For over 500 days, the broad U.S. Equity market moved sideways in a 15% range (fun fact: this was one of the tightest ranges since the inception of the S&P 500) with the most recent market low taking place in early February. More specifically, the lowest point of this 500 day period was on February 11, 2016. Was there any significance to this date? Other than being my very good friend’s birthday, we found another significant development on that date. Here it is:
“I wouldn’t take them [negative rates] off the table, but we would have work to do to make sure they would be workable.” ~ Janet Yellen | Feb 11, 2016
So on February 11, 2016, with U.S. Equities on the verge of a major breakdown, Janet Yellen decided to open her mouth and wish my friend, “Happy Birthday!” Not exactly true, but what a gift this experimental financial insight was to the broad market. Proven by buyers showing up en masse to buy U.S. Stocks since that date, the market has not looked back, gaining almost 20% in 6 months. Impressive.
As you know, we’re fans of avoiding noise and studying the facts, with price being the most important fact. That 2/11/16 low was significant. We know that by looking at price, not listening to Federal Reserve Chairs. We don’t need to guess what Janet’s words mean when we have the benefit of watching market participants (which is what we are, after all) put their money to work in the market. By watching price, we are watching the economic law of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. It’s simple. It’s fact.
Another such fact was the Industrial Sector making a higher low on February 11, signaling that the Industrial Sector could lead the market higher. And it did, outperforming the S&P 500 and leading both to new all-time-highs.
This was/is an important development as U.S. Equities perform best when the Industrial Sector leads. Don’t believe us? Check out the facts below.
By using ratio analysis, dividing Industrials (XLI) by the S&P 500 (SPY), and comparing it against the S&P 500 itself, it becomes very clear that when Industrials outperform the S&P 500, U.S. Stocks perform best.
In conclusion, as long as Industrials continue to outperform the S&P 500 while both sustain these recent all-time-highs, it means great things for the overall U.S. Stock market and your portfolio. Those long this market want to see Industrials lead the way. If Industrials cannot lead, then another correction below recent highs is likely. As always, we’ll ignore the noise and pay attention to the only thing that pays: PRICE.
Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.