The 2019 Chase For Performance May Trigger The Next Major Bull Market

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The S&P 500 may be due for an end of year rally as stocks break out all over the world. Factor in what may amount to an end year of the chase for performance and a rally could turn into the birth of a new bull market.

Big export economy stocks are in rally mode and are rising sharply. The markets in Japan, Korea, Hong Kong, and Germany are all breaking out to their highest levels in years. Meanwhile, the iShares ACWI ETF (ACWI) is also approaching its all-time high. It isn’t just the S&P 500 that is surging higher currently, and the message the global stock market is sending should not be discounted.

Gloom and Doom No More?

You may be a gloom and doomer convinced the global economy is about to go over the cliff. Or perhaps you think the stock market is going to crash like in 2008. However, that isn’t likely to happen. The stock markets all over the world would suggest the opposite, a return to growth.

Japan

For example, one big export economy, Japan, has seen its Nikkei index rise to its highest levels since October 2018. Based on the chart, it is likely to challenge its recent highs of 24,440.

Korea

Additionally, the South Korea KOSPI has risen above a critical downtrend in September and even retested that break out in early October. Now the index is ripping higher and may retest the highs from the spring of 2019 at a level of around 2,225.

Hong Kong

Even the Hong Kong Hang Seng Index is showing extreme signs of strength despite the protest and political friction taking place. The index also broke a significant downtrend and appears to be heading back to levels not seen since July 2019.

Germany

The Index in Germany, the DAX, has broken out in a significant way and is heading back to its highest levels since January 2018.

ACWI

Finally, the ACWI ETF is now approaching its all-time high, last seen in January 2018.

All of these global markets have one thing in common; they are all manufacturing-based or export-driven. They are telling you in no uncertain terms that the world is emerging from a global slowdown, and is returning to growth. These markets are sending a loud and compelling message, one that should not be ignored or underestimated, and means that the S&P 500 advance to record highs is not alone.

A New Bull Market

The S&P 500 may first be embarking on its next significant leg higher in a new bull market. The S&P 500 has now just completed its 22nd month of sideways consolidation, a pattern that is similar to 2011/2012 and 2015/2016. It was on the 23rd month of each of those prior consolidation periods that the S&P 500 broke out and rose by 740 points starting in 2013, and by 745 points beginning in 2016. Currently, November represents the 23rd month of the 2018/2019 consolidation period, and if history is a guide to the future, the S&P 500 may very well be launching its next significant advance.

Chase For Performance

One last thing to consider is the underperformance of hedge funds in 2019. According to data from Eureka Hedge, the Eureka Hedge Fund Index, which tracks 2,469 equally weighted funds, has risen by just 5.97% through the end of October. That is significantly less than the S&P 500 total return index gains of over 23% through the end of October 2019. It could suggest that many hedge funds will be chasing this market higher into the year-end to boost their returns.

Sectors To Watch

If the market does begin to rise as I expect it may, then we are likely to see a continuation of the risk-on surge in the market. That means that sectors like Technology, Semiconductors, and Consumer Discretionaries could be big winners. Additionally, global growth sectors could perform extremely well, such as Industrials and Materials stocks.

Industrial stocks are one group that is currently breaking out and surging above its 2018 highs.

Small caps are also breaking out, with the Russell 2000 attempting to rise above 1,600 for the first time since October 2018. Should that happen it could go on to rise to around 1,710.

The sectors not likely to do well, are the risk-off or defensive groups. Sectors such as consumer staples and utilities.

Financials are one group that are questionable. Should the yield curve continue to steepen and a return to growth take place as the markets are signaling, then financials can do very well. However, should yields remain relatively unchanged, they could get left behind.

Where Can Things Go Wrong?

There is a lot of optimism being built into the market that a trade deal between the US and China will be completed. However, should an agreement not be reached, it would be a big weight on the market and the global economy, and drag it lower. Additionally, it isn’t clear that once a deal with China is reached if the President will turn his attention to Europe and potentially place tariffs on our European allies.

Additionally, as we all know, 2020 is a Presidential election year. The Presidential race among Democrats is likely to be intense, and who emerges as the nominee could spook investors should their policies be viewed as too progressive. It could result in a drag on significant sectors of the market should they become talking points or the focus of the candidates.

Healthcare and drug pricing have been one area of focus in past Presidential elections, and if 2015 and 2016 serve as a guide, then healthcare and biotech space could suffer greatly. It could also weigh a lot on health insurance stocks should Medicare for All become a talking point.

It seems incredibly hard to ignore the powerful force of the global stock market. Many are currently pointing and trending in one direction, higher. Each of these markets are breaking out from a long-term slumber, and ignoring these signs may be a significant mistake.

I first fell in love with the stock market when I was 16 years. Now, 25 years later, I still have the same love and passion as when I was first learning. By the time I moved on to college, I was investing regularly and was using the money I was making from the market to pay for my tuition. 

Now after a long career as a buy-side trader I share all of my experience with you daily with timely thoughts throughout the day in Reading The Markets. Additionally, I use fundamental, technical, and options market analysis to identify individual stock ideas for you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

2019-11-07 08:37:00

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