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Wednesday, April 18, 2012 9:44:29 AM
Leading indicators of a market top By Mark Hulbert
* Wednesday, April 18, 2012
Commentary: Sector rankings help signal when a top is at hand
CHAPEL HILL, N.C. (MarketWatch) — The financial sector’s recent strong performance makes it unlikely the bull market is close to a top.
At least, that is the conclusion I reach from contrasting recent sector performance with their typical behavior prior to past stock market peaks.
The notion that the sector performance rankings are a leading indicator of a stock market top is not new, of course. I wrote a column on the subject nearly one year ago, in mid May, based on a study conducted by Ned Davis Research. ( Read my May 18, 2011, column, “Leading indicators of stock market top.” )
That study’s finding was that it wasn’t that unlikely we were “entering the early stages of a market-topping process.”
Not bad, considering that the column appeared only a couple of weeks after the market had in fact formed a top. The Dow Jones Industrial Averageat the time was less than 300 points below its late-April bull market peak; it would proceed to fall another 2,000 points between then and its early October low.
The success of that year-ago analysis prompts me to apply it to today’s market.
The key is the average performance of the S&P 500’s sectors in the three months prior to past bull market tops. Since the early 1970s, Ned Davis’ researchers found, the two sectors that most often outperformed the market prior to tops were consumer discretionary and consumer staples, while the laggards tended to be financials and utilities.
A year ago, of course, the sector performance rankings followed this template rather closely.
Not today, however.
One of the strongest sectors in the S&P 500 over the last three months, in fact, has been financials. Based on the SPDR Select Sector Financials ETF, this sector has produced a 13.0% total return over the last three months, in contrast to an 8.0% gain for the SPDR S&P 500. Only two other of the major S&P 500 sectors beat the market over this three-month period: consumer discretionary (with a gain of 11.3%) and technology(with a gain of 14.6%).
All the other major sectors underperformed, including consumer staples and utilities.
That means that, of the two sectors that tend to lag the market prior to tops, one has handily beaten the market over the last three months and one has lagged. A similarly split verdict applies to the two sectors that tend to lead the market prior to tops.
The data don’t speak with one voice, to be sure. They never do.
But I think it is safe to say that the sectors’ recent returns do not fit the mold of performance prior to past market tops.
This doesn’t mean the market isn’t close to a top, of course. It just means that, if the market is, it would be following a different script than the one that the market has tended to follow over the last four decades when forming such tops.
http://www.marketwatch.com/story/leading-indicators-of-a-market-top-2012-04-18?link=home_carousel
George.
Click on "In reply to", for Authors past commentaries.
* Wednesday, April 18, 2012
Commentary: Sector rankings help signal when a top is at hand
CHAPEL HILL, N.C. (MarketWatch) — The financial sector’s recent strong performance makes it unlikely the bull market is close to a top.
At least, that is the conclusion I reach from contrasting recent sector performance with their typical behavior prior to past stock market peaks.
The notion that the sector performance rankings are a leading indicator of a stock market top is not new, of course. I wrote a column on the subject nearly one year ago, in mid May, based on a study conducted by Ned Davis Research. ( Read my May 18, 2011, column, “Leading indicators of stock market top.” )
That study’s finding was that it wasn’t that unlikely we were “entering the early stages of a market-topping process.”
Not bad, considering that the column appeared only a couple of weeks after the market had in fact formed a top. The Dow Jones Industrial Averageat the time was less than 300 points below its late-April bull market peak; it would proceed to fall another 2,000 points between then and its early October low.
The success of that year-ago analysis prompts me to apply it to today’s market.
The key is the average performance of the S&P 500’s sectors in the three months prior to past bull market tops. Since the early 1970s, Ned Davis’ researchers found, the two sectors that most often outperformed the market prior to tops were consumer discretionary and consumer staples, while the laggards tended to be financials and utilities.
A year ago, of course, the sector performance rankings followed this template rather closely.
Not today, however.
One of the strongest sectors in the S&P 500 over the last three months, in fact, has been financials. Based on the SPDR Select Sector Financials ETF, this sector has produced a 13.0% total return over the last three months, in contrast to an 8.0% gain for the SPDR S&P 500. Only two other of the major S&P 500 sectors beat the market over this three-month period: consumer discretionary (with a gain of 11.3%) and technology(with a gain of 14.6%).
All the other major sectors underperformed, including consumer staples and utilities.
That means that, of the two sectors that tend to lag the market prior to tops, one has handily beaten the market over the last three months and one has lagged. A similarly split verdict applies to the two sectors that tend to lead the market prior to tops.
The data don’t speak with one voice, to be sure. They never do.
But I think it is safe to say that the sectors’ recent returns do not fit the mold of performance prior to past market tops.
This doesn’t mean the market isn’t close to a top, of course. It just means that, if the market is, it would be following a different script than the one that the market has tended to follow over the last four decades when forming such tops.
http://www.marketwatch.com/story/leading-indicators-of-a-market-top-2012-04-18?link=home_carousel
George.
Click on "In reply to", for Authors past commentaries.
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