Economically sensitive cyclical industries exhibit bullish trends

Key points:

• Over 90% of cyclical industries are trading above their respective 10, 20, 50, 100, and 200-day averages
• Similar trends for economically sensitive stocks preceded solid returns and consistency for the S&P 500
• Growth-oriented sectors tended to outperform the S&P 500 over the following year

Economically sensitive industries suggest the uptrend is sustainable

Last week, I highlighted that numerous cyclical industries broke out to 52-week highs, signaling positive participation from economically sensitive groups. Since then, market breadth has strengthened further, with more cyclical groups establishing bullish trends over short-, medium-, and long-term horizons. 

For the first time in over six months, 90% of cyclical sub-industry groups simultaneously closed above their respective 10, 20, 50, 100, and 200-day moving averages. This broad-based strength signals a resurgence in bullish trends, typically associated with sustained market rallies.

The following chart highlights these trend conditions against the backdrop of major bear markets, reminding us that when market breadth is favorable, like now, history does not favor an imminent downturn. 

Since 1950, a 90% or higher reading across all five moving average horizons has never been observed at the peak of a significant bear market. 

Similar trend conditions from cyclical groups preceded solid returns

When 90% of cyclical sub-industry groups close above their respective 10, 20, 50, 100, and 200-day moving averages for the first time in six months, and the S&P 500 is within 2% of a five-year high, the world's most benchmarked index displayed solid returns and consistency across all time horizons.

Over the following three months, the S&P 500 advanced 81% of the time, achieving 13 consecutive gains since 1992.

Following similar precedents, the S&P 500 experienced only one maximum loss exceeding -10%, and that instance was associated with the 1987 stock market crash. 

Similar to the outlook from last week's cyclical industry breakout report, growth-oriented sectors generally outpaced the S&P 500 over the subsequent year.

What the research tells us...

The ongoing improvement in market breadth, particularly among economically sensitive industries, suggests investors should maintain a bullish stock market bias. Following similar precedents when most cyclical industries displayed positive trend profiles over several time horizons, the S&P 500 consistently delivered solid returns over the next year. Furthermore, significant drawdowns were limited, with only one instance surpassing -10% over the ensuing three months. If history rhymes, investors would be wise to keep an eye on growth-oriented sectors.