The Spread: A Sign We're in Troubled Waters!

Sometimes I refer to “the market” when I’m describing how a majority of stocks are behaving. But that doesn’t mean that investors are limited to a single, binary view of the market – either bullish or bearish. Really, you should be focusing on individual sectors – particularly the ones that are outperforming.

After all, the stock market consists of nine different sectors, each with their own performance characteristics and personalities. And many of them offer far better profit opportunities than “the market.”

This is especially important to consider in times like today, when individual sectors are performing much differently than the overall market – some much better, some much worse.

So far this year, the S&P 500 is up a meager 3%.

Yet, the highest performing individual sector – health care – is up more than four times that, at 12.3%. Meanwhile, the worst performing sector – energy – is down 9.1% year-to-date.

That’s a massive spread between the top- and bottom-performing sectors.

This tells me two things. It tells me that it’s still profitable to focus your investing efforts on sectors that are outperforming, like I do in Cycle 9 Alert, as opposed to a single index.

But it tells me something else: that investors are losing confidence in the broader stock market’s bull run.

We saw something similar in late July, 2011. The S&P 500 suffered an 18% correction. That prompted investors to suddenly become more selective in the stocks and sectors they chose – most opting for less risky investments.

Simply put: investors become selective when they’re uncertain about the broader market’s trend.

That’s what happened after the 18% sell-off in 2011. And that’s what’s happening today.

Mind you, the broader stock market hasn’t sold off yet… but investors are already becoming very picky about which sectors they’ll buy.

Yesterday, I shared with Cycle 9 Alert subscribers my proprietary measure of the spread between the best- and worst-performing sectors. Currently, it’s reading its highest level in years.

And that means, not only are investors becoming picky… they’re also losing faith in the broader bull market.

But remember, investing in the broad market isn’t your only option. Instead, opt for a strategy like my Cycle 9 Alert, where we invest in top-performing sectors.


Adam O'Dell

Adam O’Dell

Chief Investment Strategist, Dent Research