A bullish confirmation from cyclicals

Key points:

• The average distance below a high for a basket of cyclical groups climbed within 2.5% of a 52-week high
• Comparable participation trends preceded a 100% win rate for the S&P 500 over the following year
• Most cyclical groups outperformed the world's most benchmarked index across multiple time frames

Cyclical groups suggest the uptrend persists

Following a rapid rise in interest rate-sensitive stocks, a composite that measures the average distance below a high for a group of cyclical industries climbed to within 2.5% of a 52-week high, triggering a signal for a member in the TCTM Composite Confirmation Model.

The purpose of this model is not to provide a timely market signal but rather to validate a transition from a bearish to a bullish trend. Thus, even though it took 440 sessions to trigger after the October 2022 low-far exceeding the average of 169-I still see the alert as a favorable sign for the bulls.

The composite includes industries from a broad spectrum of the economy, encompassing automobiles, transportation, housing, consumer goods, banking and credit, manufacturing, and small businesses.

Although several members of the composite approached or surpassed their 52-week highs months ago, the Auto/Auto Parts index (due to Tesla's influence) and the Russell 2000 index (impacted by regional banks) significantly weighed upon the composite average until a significant surge in small-cap stocks last week.

Comparable participation trends preceded positive returns

When the average distance from a 52-week high for a composite of cyclical groups transitioned from below -20% to above -2.5%, the S&P 500 demonstrated remarkable returns and consistency, achieving a perfect win rate a year later. Furthermore, three to twelve months later, returns showed significance relative to random returns over the study period.

Following similar precedents, cyclical sectors like Consumer Discretionary, Financials, and Industrials outperformed the S&P 500 over the subsequent year.

Technology, which is still exhibiting a positive relative trend versus the S&P 500 despite a 7% drawdown as of last Friday, typically outperformed over the ensuing three months but underperformed from six to twelve months later.

What the research tells us...

The average distance below a 52-week high for a composite of cyclical groups transitioned from below -20% to above -2.5%, triggering a bullish confirmation signal for a TCTM Composite Confirmation Model member. Similar alerts produced outstanding results for the world's most benchmarked index over the subsequent year, suggesting the uptrend persists. As I said last week, broadening is a positive development and most likely extends the duration of the advance. However, it does not always equate to a change in leadership. For now, relative trends still favor growth-oriented groups. Remember, as Jesse Livermore once said, "To anticipate the market is to gamble. To be patient and react only when the market gives the signal is to speculate."