According to Jason Goepfert, a senior research analyst at SentimenTrader, the underperformance of small caps and discretionary stocks during the S&P 500's record rally is not historically a reliable warning signal. This market dynamic occurred as the S&P 500 hit fresh highs following a 15% drawdown, while both small-cap and consumer discretionary stocks remained more than 5% below their peaks.
"It pays to investigate when claims are made that a breakout may not last for whatever reason, especially if that makes theoretical sense, like the disturbing message that lagging small-cap and discretionary stocks might send," Goepfert noted. Historical data shows only three similar precedents since 1926, with none resulting in significant market downturns. In fact, the S&P 500 averaged gains of 2.7% in the following month and 6.1% over six months in these setups. However, Goepfert acknowledged one exception in 1990 that preceded a recession and market correction.
To access Jason Goepfert's full research note and other market insights, visit sentimentrader.com.