By: Chris Rowe — February 5, 2019
This even takes into account the very bullish 1987 bull market.
You read that correctly.
1987 was actually an incredibly strong year with the S&P 500 up 39% mid-year. Think about that - that's about 5X the stock market's average annual return over any very long-term time frame.
In the fourth quarter of 1987, the stock market lost about 1/3 of its value so it's remembered as a bad year, but it closed the year with a gain (over 2%).
I am not suggesting we have another crash in the cards in the near-term.
But when we look at the strength of the major asset classes, we see an immediate change in the breadth of the strength that's hitting the global financial markets.
In other words, it's not just U.S. stocks, it's not just international stocks (emerging or developed countries) and it's not just bonds. There's strength across the board!
This broad-based strength is a sign of a strong global financial market.
Within the U.S. stock market, which is broken down into 11 major sectors, the most improvement in strength has been seen in Technology and Consumer Cyclicals. These are what we call "risk-on" sectors - sectors that do well when the largest, most powerful investors have an increased appetite for risk.
The sector that's lost the most strength? Utilities (the "risk-off" sector).
When we look at the stock market in more detail, by breaking it down into 41 sub-sectors, we see enormous improvement. And there are two parts to this.
First, we have seen the market shift from a condition where nearly all sectors (except for Precious Metals) went from Supply being in control to Demand being in control (except for Savings & Loans).
Second, we have seen the 41 sectors go from being broadly oversold, to moving much closer to the middle of their range.
Many readers know that we track the "breadth" of each sector using a number of tools. The most powerful long-term indicator of an "oversold" condition (Supply in control) or an "overbought" condition (Demand in control)...
... is the breadth indicator called the "Bullish Percent Index".
Without making this into a lesson on "sector BPIs", suffice it to say that this extremely broad-based change, from Supply to Demand, coming as it has from out of extremely washed out (oversold) territory, sets us up for an incredibly strong stock market.
Keep in mind that the sector BPIs you see in the BPI bell curve, above, have moved from the far left (oversold), but have yet to arrive at even the middle of the curve, yet.
Following the action described above, these sectors historically (almost like clockwork) tend to move as far up as the 60%... 70%... 80% range (depending on the sector). That is, from the far left up to the far right.
This translates into a strong long-term bull market. Sector BPIs do not move from the far left to the far right unless a huge number of stocks in each sector push much higher, above key resistance levels.
The last time this happened was in early 2016. What followed was the strongest bull market since the mid-1990s. I can go on and on about sector breadth but I'll stop there.
The next thing we want to know is: which sub-sectors to invest in. A recent study, covering a 15-year period, found that there was a 192% dispersion, on average, between the best and worst performing sub-sectors.
For example, if the strongest sector was up 150% and the weakest sector was down 42%, that's a 192% dispersion.
We are able to spot those sectors most likely to show the greatest strength over the coming year by using our "sector relative strength studies".
We compared each of the 41 sectors' price strength, one against another...
... and the #1 ranked sector is the "Energy Other" sector, which is comprised of alternative energy stocks, such as solar and wind energy.
The two most popular sector ETFs for solar or wind energy right now are "TAN" and "FAN", respectively.
I hope you do well with the two alternative energy sector funds I mentioned above. But keep in mind, at some point the tide will shift and institutions will start selling out of the sector.
You can see these changes in the very early stages with the indicators you read about today.
Please be safe!