I remain quite bullish about 2020 prospects and one reason is the relative strength of our 5 aggressive sectors - technology (XLK), consumer discretionary (XLY), communication services (XLC), financials (XLF), and industrials (XLI). Wall Street has not positioned itself for anything other than a market advance ahead, so you should be positioned the same. One clue of an impending top is when we see an extended period of relative weakness in one or more aggressive sectors. Check out sector relative strength at the market top before our last bear market, which began in 2007:
The XLC wasn't shown separately through most of the above period, but check out the relative weakness of both financials (XLF) and consumer discretionary (XLY) AT THE MARKET TOP! GDP is made up of roughly 2/3 consumer spending. If the XLY:$SPX ratio is at a multi-year low at a market top, what is that telling us? And how about financials doing the same thing - moving to a relative multi-year low just as the S&P 500 sets a record high? Wall Street saw it coming and positioned itself out of harm's way long before you and I started feeling the pain. Wasn't the financial crisis in 2008? Why did we see relative weakness in the sector years before the actual crisis?
These bear markets aren't accidents. They don't just happen overnight like the media would like for you to believe. They take time to develop and if you watch your relative strength charts, you'll see it begin unfold before it actually happens.
So let's fast forward to 2019 as we prepare for 2020. How about we look at that same chart, shall we?
The XLF and XLI have struggled during periods of S&P 500 consolidation. But both are now moving up on a relative basis and arguments certainly could be made that Wall Street has begun favoring these two groups once again - similar to 2016 just before a massive rally.
I know this is only one chart, but if something bad lies ahead, no one has told Wall Street about it.
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Tom Bowley, Chief Market Strategist, EarningsBeats.com