Study: what happens next to stocks when Tech massively outperforms Utilities and Consumer Staples


The tech sector has massively outperformed the utilities and consumer staples sectors over the past year.

  1. The S&P 500 Information technology sector is up 33%…
  2. While the Utilities sector is down -8%….
  3. While the Consumer Staples sector is down -8%

Some people see this as a bearish sign for the stock market because “tech is in a bubble”.


That’s a slightly wrong conclusion. This phenomenon happens either:

  1. Near the end of bull markets, when the bull market has 1-2 years left, or…
  2. Near the beginning of bear markets, when the previous bear market ended just a few months ago.

Since we are 9 years into the current bull market, this phenomenon is a sign that the bull market doesn’t have many years left.
Here are the historical cases in which the tech sector outperformed the utilities sector by 40% over the past year, and what happens next to the S&P 500.
October 26, 2009
The tech sector outperformed utilities in the year preceding October 26, 2009. But that’s because this was the first rally of the present bull market. Since tech is a more volatile sector than utilities, it’ll naturally go up surge a lot more than utilities because the entire U.S. stock market soared from March-October 2009.
This historical case doesn’t apply to today because we are 9 years into the current bull market (late stage, not early stage).

September 5, 2003
The tech sector outperformed utilities in the year preceding September 5, 2003. But that’s because this was the first rally of 2002-2007 bull market. Since tech is a more volatile sector than utilities, it’ll naturally go up surge a lot more than utilities because the entire U.S. stock market soared from October 2002 – September 2003.
This historical case doesn’t apply to today because we are 9 years into the current bull market (late stage, not early stage).

December 8, 1998
This historical case is most similar to today. The tech sector massively outperformed by utilities sector by 40% in the late stage of the dot-com bubble.
However, the bull market continued for more than another year before topping. The stock market soared during that last year.

Conclusion

When tech massively outperforms low beta sectors like Utilities or Consumer Discretionary, it’s a sign that the broad stock market (S&P 500) is either in the early stage of a bull market or late stage of a bull market.
We certainly aren’t in the early stage of this bull market. Hence we must be in the late stage of this bull market.
However, the caveat here is that even though we are in the late stage of this bull market, it probably has at least another year left.

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4 comments add yours

  1. Interesting observation Troy. This bull market has been on a pretty long run and it really looks overdue to end soon. I think it is important to be aware of this and prepare for it when it happens.

  2. Thanks for all your great studies. Only a very few people mention this. The bull market that started in 2009 ended in 2016. So this current market is only a 2.5 years old. Many technicals were as extreme as 2009, so it too was a major bottom.

    • Very true. But that’s not how I define a “bear market”. I don’t define bear markets as 20%+ declines.
      To my model, only 2007-2009, 2000-2002, 1973-1974, and 1968-1970 were bear markets.

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