Amidst a whirlwind of volatility in the past week, the prevailing trend in the U.S. stock market remains resolutely bullish. Notably, sector relative-strength rankings are corroborating this, notwithstanding the market’s recent fluctuations. The bullish sentiment is underpinned by an analysis of historical sector performance, which typically signals the conclusion of bull markets. However, recent market behavior deviates from this historical norm: sectors that traditionally thrive at the end of bull markets are currently trailing, while those usually faltering are displaying remarkable strength. This incongruity between contemporary sector performance and historical trends, as depicted in the accompanying chart, does not definitively assert the continued existence of the bull market but suggests that premature pessimism may be unwarranted. The recent rally in the S&P 500 index further bolsters this sentiment, despite six consecutive sessions of decline preceding it.
Twice within the past year, sector relative-strength rankings have been employed to assess the market’s trajectory. The first instance occurred in early April 2023, amidst widespread skepticism regarding the emergence of a new bull market. Contrary to prevailing doubts, the rankings indicated the onset of a bullish phase rather than a mere correction within a bear market. Subsequently, the S&P 500 index has surged by over 22% on a total-return basis. The second assessment took place in mid-August 2023, coinciding with the index hovering approximately 5% below its recent peak. Similar to the current scenario, doubts loomed regarding the sustainability of the bull market. However, analysis based on sector relative-strength rankings suggested that the downturn did not signify the demise of the bull market. Indeed, the subsequent performance of the S&P 500, boasting a 15% increase on a total return basis, validated this assessment.
To grasp the magnitude of the disparity between prevailing sector relative-strength rankings and historical patterns signaling the conclusion of bull markets, one must consider the rank correlation coefficient between the two. This statistical metric, ranging from a theoretical maximum of 1.0 (indicating identical rankings) to minus-1.0 (reflecting perfect inversion), currently stands at minus-0.70—a notably low reading in recent decades. By contrast, the correlation coefficient stood at minus-0.01 in August of the previous year and at plus-0.31 in April 2023. Evidently, sector relative-strength readings have progressively diverged from the established pattern indicative of bull market endings.
In conclusion, premature reports of the demise of the bull market may be misguided. Despite recent market turbulence and divergences from historical norms, the prevailing bullish sentiment, supported by sector relative-strength rankings and recent market performance, suggests that prudence should prevail over pessimism. As investors navigate through uncertain terrain, a nuanced understanding of market dynamics and careful evaluation of sector performance remain indispensable tools for making informed investment decisions.