Finding Predictability Amid the Uncertainty on Wall Street

Looking for any sign of normalcy during these tumultuous times? Any sign at all?

Finding Predictability in the S&P 500

Source: Shutterstock

Well, you may be glad to know that during this moment of incredible uncertainty on Wall Street, the stock market is actually following some fairly familiar patterns.

We all know that the U.S. economy fluctuates between periods of expansion and contraction. Sometimes those fluctuations last a few years, and sometimes they last a little longer.

We’ve all been spoiled for the past decade because the expansionary period — and the related bull market — lasted for so long.

However, all expansions eventually come to an end, and it looks like we’re at the end of the most recent expansion.

The good news is that all contractions also eventually come to an end, so we can all be on the lookout for it. Hopefully it’s not too far around the bend.

So, what are we seeing now in the stock market, and what should everybody be looking for in the future to identify the bullish turn?

Sector Rotation in the S&P 500

Historically — remember, we’ve seen market corrections before — when the stock market pulls back, defensive sectors, like healthcare, consumer staples and utilities, tend to outperform.

Similarly, when the stock market starts to bottom out, more aggressive sectors, like financials, consumer discretionary and technology, tend to outperform.

The business cycle chart in Fig. 1 illustrates the relationship between the stages of the cycle — expansion and contraction in the economy — and the stock market sectors that tend to outperform during each stage of the cycle.

Source: Chart by InvestorPlace

Fig. 1 — Sector Rotation during the Business Cycle

So, what’s happening now?

Since the S&P 500 hit its peak on Feb. 19, every sector in the market has experienced a double-digit percentage drop.

However, some sectors have outperformed others during the bear-market reversal. Can you guess which ones?

Which Sectors Are Outperforming?

Let’s look at a comparison chart of the S&P 500 and the 10 S&P 500 sectors as represented by the Select Sector SPDR exchange-traded funds (ETFs). These ETFs are tracked by State Street Global Advisors.

Here’s the breakdown of the performance of each fund in the sector-comparison chart in Fig. 2:

  • Health Care Select Sector SPDR Fund (NYSEARCA:XLV): -17.2%
  • Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP): -17.3%
  • Technology Select Sector SPDR Fund (NYSEARCA:XLK): -23%
  • Utilities Select Sector SPDR Fund (NYSEARCA:XLU): -24.1%
  • SPDR S&P 500 Fund (NYSEARCA:SPY): -26%
  • Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY): -28.1%
  • Materials Select Sector SPDR Fund (NYSEARCA:XLB): -28.2%
  • Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE): -29.4%
  • Industrial Select Sector SPDR Fund (NYSEARCA:XLI): -32.6%
  • Financial Select Sector SPDR Fund (NYSEARCA:XLF): -36.2%
  • Energy Select Sector SPDR Fund (NYSEARCA:XLE): -49%

Source: Chart courtesy of TradingView

Fig. 2 — SPDR Sector ETFs Comparison Chart, Mid-March to April

As you can see, three of the top four performing sectors during the past six weeks are healthcare, consumer staples and utilities.

This is exactly what we would expect to see.

So, why is this good news?

It’s good news because even though we don’t know exactly what is going to happen next in the novel coronavirus pandemic, we can be quite confident that Wall Street is going to behave like it has during past pullbacks.

That means we can put the odds in our favor by making trades that are informed by history.

It also means we can watch the financial, consumer discretionary and technology sectors for signs of a turnaround in the future and be confident in what we’re seeing.

The Bottom Line

We haven’t seen the end of the volatility on Wall Street. Every new revision in the United States’ potential Covid-19 death toll will bring swings in the stock market.

However, we can navigate these choppy waters. We’ve got a few historical lighthouses on the shore serving as markers that we can watch to avoid the rocks.

John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did itJohn & Wade do not own the aforementioned securities. 

Article printed from InvestorPlace Media,

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