Record highs for cyclical sectors bodes well for the broad market advance

Key points:

• The discretionary, financial, industrial, and technology sectors closed at record highs within the last week
• Similar cyclical sector breakouts produced an 86% win rate for the S&P 500 a year later
• Growth-oriented sectors like discretionary and technology outperformed the S&P 500 

Cyclical sectors suggest the uptrend in stocks persists

In a remarkable development, the consumer discretionary, financial, industrial, and technology sectors reached new record highs over the last week, marking the first coordinated breakout since 2021. 

This synchronized advance among cyclical sectors signals a bullish alignment between indexes (external price trends) and individual stocks (internal price trends), as detailed in my report "Cyclical Stocks Dominate the New Highs List."

I applied two resets to filter out repeats: the first reset required the sector count to drop to zero, and the second identified the first signal in two months. 

Comparable breakouts preceded positive returns for the S&P 500

Whenever the discretionary, financial, industrial, and technology sectors recorded all-time highs within one week of each other, the S&P 500 rallied 86% of the time over the subsequent year, with no losses since 1987.

From one week to two months later, returns generally underperformed historical averages. Furthermore, the average maximum loss exceeded the maximum gain in three out of four horizons, and z-scores were uninspiring.

The bottom line is that while stocks should advance over the next year, the pace could slow in the near term.

Over the following six months, the S&P 500 experienced just two maximum losses exceeding 10%, each tied to extraordinary events, including the 1987 crash and the Covid outbreak. 

Growth-oriented sectors surpassed the S&P 500, with consumer discretionary and technology sectors demonstrating the most consistent outperformance from two to twelve months later. 

Current trends

Financials across large, mid, and small-cap stocks lead the relative trend score rankings, closely followed by industrials, while consumer discretionary and technology sectors show strength primarily in large-cap stocks. 

What the research tells us...

The record highs achieved over the last week by the discretionary, financial, industrial, and technology sectors-cyclical groups sensitive to economic conditions-represents a bullish development for the broader market. These sectors, which are typically driven by consumer spending, business investment, and innovation suggests that investor confidence in the economy remains resilent, reinforcing the notion that the uptrend in the market is likely to persist.