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Oppenheimer's Ari Wald says if we look back to 2015 and 2016, we formed an important market bottom in February 2016 when the S&P 500 was trading around the 1800-level.
Historically speaking, that was consistent with a non-recessionary bear market. Even though the economy didn't reset, price action did, and Wald believes we may have completed the second year of a 3-year cyclical bull market.
If that's the case, and we are in the final year, the uptrend is likely to moderate going forward, Wald said.
“Some of our momentum indicators peaked on that February pullback,” said Wald. “Historically, momentum peaks up to a year ahead of final price action. So, yes, we are entering that final phase of the bull market. We think it's going to make selection that much more important, but we do think the bull market is still intact.”
In short, if the market's momentum peaked this year, we should expect the final price high to occur roughly a year later in 2019.
Source: Stockcharts.com, Financial Sense Wealth Management
Participation Narrowing, Which Sectors Win?
The number of stock market sectors participating in the advance is likely to narrow, Wald noted.
It’s the cyclical areas of the market where we will see flows come in. Counter-cyclical safety sectors with high dividends are where we’ll likely see the most risk.
The three best sectors are likely to be Technology, Financials, and Industrials, Wald believes.
We’ve seen a steady advance, which also highlights strength. Another major factor is tech has shown its resiliency to fluctuating interest rates and commodity prices, which has been the key driver of sector rotation in recent years.
“It's very telling that the tech sector is already out to new highs, while the rest of the market is still below where it was in January,” Wald said. “That's a sign of relative strength. … We think tech is a secular story. If we're in some sort of longer-term secular bull market, we think tech is a prime candidate not only to lead for the rest of this cycle for the coming months and quarters, but potentially for coming years as well.”
Risk and Reward for Average Investors
There may be some risk for those holding index funds here, but we haven’t seen this yet, Wald stated, with breadth holding up so far.
The average stock is still doing well, he noted. Historically, breadth does tend to peak up to 5 months ahead of the overall market, so if the S&P 500 rallies back to new highs, it will be important to watch that the other key market averages rally with it.
Given the time correction we’re in, Wald stated, he had some advice for investors.
“I would be investing as if this was still an intact bull market,” he said. “We think that this final phase could last up to a year potentially, and I want to be exposed to the sectors most likely to outperform in a rising market environment. … I want to own technology, financials, and industrials. That's where I would be putting money to work right here in anticipation for a resumption of the uptrend.”
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