Nobody loves a great bull market greater than me. Historical past tells us that we wish stay totally on the facet of the bulls. Perma-bears have an terrible long-term observe report. They’ve known as 30 of the final 3 secular bear markets. Truthfully, those that can not ever see something apart from a downtrend forward ought to discover a new occupation or interest. Here is the long-term chart of the S&P 500.
GDP + inflation + innovation = roughly a mean 9% annual achieve on the S&P 500. Ask your self a query. What number of occasions have you ever exited the inventory market and wished you had simply left your funding alone and untouched? Be sincere.
Severely, how typically do perma-bears get it proper? Hey, hear, there’s nothing fallacious with being bearish on occasion for those who’re a shorter-term dealer. The inventory market strikes too far generally and rightfully must right. And after years of secular bull market power, there comes a time when shares want greater than a easy correction and a secular bear market is justified. For my part, that is not now. Speak to me once more in 2030. We can’t be in a single for a very long time as the present 11-year secular bull market rages on. However, even throughout a secular bull market, the bulls should acknowledge when short-term dangers develop and portfolio changes must be thought-about.
I consider now is an effective time to lean on perspective and the influence it might have in 2024.
Everyone knows (or ought to know) that the three aggressive sectors – expertise (XLK), client discretionary (XLY), and communication providers (XLC) – have a tendency to steer most secular bull market advances. However they do not lead all of them. And there are examples proper now that possibly our leaders have led for a bit too lengthy.
The S&P 500 simply superior greater than 16% in 41 buying and selling days from October twenty seventh by December twenty eighth. We will use a 41-day price of change (ROC) to see how typically this 16% degree is reached or exceeded on this timeframe. Examine this out:
Any such transfer sometimes happens after an enormous bear market transfer decrease or after a correction. The 2023 prevalence got here on the heels of the July by October correction. These large beneficial properties are usually not regular and infrequently end in comparable beneficial properties transferring ahead. We have to pause and permit these beneficial properties to be absorbed. Additionally, election years are weak traditionally throughout Q1, which is precisely the place we’re located proper now. Whereas I anticipated a scorching January in 2023 based mostly on just a few of my alerts, I do not count on that in any respect in January 2024. Lows in election years are likely to coincide with March.
At present, the biggest sector within the S&P 500 is expertise, which represents 28.79% of the benchmark. Discretionary represents 10.84% and communication providers totals 8.55%. So these 3 aggressive sectors comprise 48.18%, or practically half of the benchmark. If these 3 teams merely take just a few months to soak up current beneficial properties, we might simply see rotation transfer into different areas like industrials (XLI), financials (XLF), or well being care (XLV). These 3 extra value-oriented sectors signify greater than 34% of the benchmark. Whereas XLY is within the aggressive sector camp, it truly seems prefer it might nonetheless present a elevate to the S&P 500. Extra on that beneath.
Expertise (XLK) is clearly the one to look at although because it has the most important influence on the S&P 500. At present, from this chart alone, I see important dangers forward for those who’re overweighting expertise:
Nothing on this chart seems notably encouraging for expertise. The highest a part of this chart tells us that expertise’s relative momentum was VERY stretched – just like 2020 – and we all know what occurred subsequent. It was a prolonged interval of common to underperformance vs. the S&P 500.
The center a part of the chart exhibits that the XLK:$SPX relative power is on the higher finish of its relative uptrend, which makes it troublesome to proceed outperforming. Actually, it is in all probability time to contemplate weak relative power forward. Lastly, the underside panel charts the 52-week relative efficiency. Cash has poured into expertise over the previous yr – once more just like 2018. It would not be regular for this to proceed larger. As soon as once more, this tells me the danger is to the draw back and it isn’t well worth the threat of overweighting expertise proper now.
I will make one final level in regards to the probably relative weak spot in expertise. Take a look at this 20-year weekly chart of the XLK:
We’re on the prime of the XLK’s 15-year channel, which has been problematic at each level on this channel, excluding the after-effects of the pandemic. It simply seems like time for a change in management for a bit.
So all of this leads me to an enormous query. If expertise underperforms, the place ought to we search for relative power?
The XLY is buying and selling a lot nearer to its decrease uptrend line, suggesting power might simply discover its approach right here.
The XLV has been consolidating and, due to this fact, underperforming the S&P 500 for fairly awhile. The current breakout would be the set off this group must see much more cash rotating IN.
Technically, we do not normally see this group lead. Given the circumstances of the 2008-2009 monetary disaster, the XLF has been a troublesome place to generate profits. However I consider the group was undervalued whereas short-term charges jumped and resulted in an inverted yield curve. 2024 is prone to reverse that situation, which is able to profit the web curiosity margin for banks ($DJUSBK), a big basic tailwind. Ought to our financial system develop in 2024, which I consider it is going to, it might be a goldilocks state of affairs for banks – a strong, and even perhaps enhancing, financial system coupled with rising spreads.
Will probably be very fascinating to see how the primary quarter of 2024 develops. Whereas I can not assure outperformance or underperformance of any space, I do consider that we will assess threat and make extra knowledgeable buying and selling/investing selections.
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Blissful buying and selling!
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, an organization offering a analysis and academic platform for each funding professionals and particular person traders. Tom writes a complete Every day Market Report (DMR), offering steering to EB.com members day-after-day that the inventory market is open. Tom has contributed technical experience right here at StockCharts.com since 2006 and has a basic background in public accounting as nicely, mixing a singular ability set to method the U.S. inventory market.