Sector rotation: either big gains or a market crash over the next 2 years


We’ve looked at the U.S. stock market’s sector rotation recently. Our conclusion was simple: sector rotation is usually a short term and long term bullish sign for the stock market.
We can look at this sector rotation in another way.
Last week, the Dow (large caps) went up >2% while both the Russell 2000 (small caps) and NASDAQ fell.
This is rare. This has only happened 7 other times from 1987-present.
Here’s what happened next to the S&P 500 (historically).

As you can see, even in the worst case scenario (year 2000), the stock market does well over the next 3 months.
Here are the S&P 500’s returns over the next 2 years.

Conclusion

This study is very interesting. Notice the divergence in cases.

  1. 5 historical cases SOARED over the next 1-2 years.
  2. 2 historical cases CRASHED over the next 1-2 years (this was the dot-com bubble top).

In other words, the markets will either soar for another 1-2 years or the bull market’s top is already in. There is no middle ground.
Based on the previous sector rotation study, I think another 1-2 year rally is more likely.
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