Sometimes I find myself caught up in the little details of the market -- things like the price-to-earnings ratio of the S&P 500, the volatility index, the 10-year Treasury yield -- and I neglect to step back and look at the bigger picture.
I've found myself doing this a lot lately, more specifically with individual stocks. If a trade goes wrong, I dive into the financials, charts and indicators to see what I missed... and see how I can improve going forward.
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But as the common saying goes when you're finagling over some of the finer details... you can't see the forest for the trees.
Today, we have record-low unemployment and we're coming off an incredible year in the market that saw pretty much no volatility and a 19%-plus return. The S&P 500 is up more than 284% since the bottom of the financial crisis.
Getting to this point has been pretty remarkable... We've had record-low interest rates, quantitative easing (QE) one, two and three, we've seen the price of oil rise to more than $100 per barrel, only to see it tumble to less than $40. We've also endured the concerns over China's economy, the European Union, Japan's Tsunami and nuclear disaster, and the Greece debt crisis. There's been plenty of other events along the way, too, but you get the point... it's been a crazy trip, to say the least.
Where We Are Today
As I was taking this walk down memory lane, I couldn't help but wonder where we might be in the market cycle today. Of course, I'm sure that's on the minds of every investor, but think about each of those events I just mentioned... as each one came we would wonder if "this" would be the one to send stocks tumbling and put us back in a recession, only to see it pass by without so much as a stir.
To figure out where we might be, I once again found myself scouring over the numerous indicators and data points that are out there. But maybe it's much simpler than that...
Taking a step back, I began thinking about the business cycle. As a quick refresher, the business cycle refers to broad economic business activity, commonly measured by GDP, whereas the market cycle typically refers to the stock market.
There are four phases of the business cycle: expansion, peak, contraction and trough. According to the National Bureau of Economic Research, June 2009 was the trough. The trough marked the end of the previous recession that began in December 2007 (which lasted 18 months) and the beginning of an expansion.
As we go through these business cycles, we can infer sector performance over the intermediate term. For example, early in the expansion phase of the business cycle, industrial and consumer discretionary stocks tend to lead the charge:
As you can see, coming out of the depths the recent financial crisis, both of these sectors outpaced the S&P 500 by more than 50 percentage points over the next year-and-half.
Historically, during the later stages of the expansion phase (right before a recession), the sectors that do best are ones tied to commodities -- basic materials and energy -- as their prices are tied to the prices of raw materials, which do well when restrictive monetary policies are put into place (raising rates), and inflation builds.
In 2017, the energy sector as measured by the Energy Select Sector SPDR Fund ended the year flat. However, one of the best performing sectors was basic materials, which returned 24%, as measured by the Materials Select Sector SPDR Fund.
Digging deeper, I found that during the previous two stock market crashes, commodities continued to surge even after the S&P 500 drifted lower... but the commodity rally didn't last long (8.5 months on average).
Zooming in to look at these same two indexes over the past year, we can see that a divergence happened in March... the S&P 500 drifted lower and the commodity index surged higher...
To me, this was a bit of an eye-opener...
Looking at the bigger picture (the business cycle) we know that historically commodity-oriented sectors outperform during the late stages. Basic materials just had a spectacular year... and my MP Score system just tagged an energy stock, which tells me momentum is shifting toward that industry.
In short, the U.S. Federal Reserve began tightening the money supply by increasing the federal funds rate, commodity stocks are picking up steam, which happens late in the business cycle, and we just saw a major divergence in the commodity index and the S&P 500. So maybe we've seen the peak of this bull market?
Your End-Of-Bull-Market Game Plan
I don't know for sure, but what I do know is that the last two times we've had a setup like this we could still make money from commodity-related stocks... but only for about eight months following the peak of the S&P 500. If that turns out to be the end of January, then followers of my MP Score system have until the end of September to make money.
And as soon as the market begins to turn against, the same system will signal it's time to get out... then show us our next money-making opportunity.
It's really that easy -- we just sit back and count the returns. I'm talking about gains like 181% on Lannett (NYSE: LCI), 135% on Westmoreland Coal (Nasdaq: WLB), and 242% from Bitauto (NYSE: BITA), all while the MP Score does the heavy lifting.
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This article originally appeared on StreetAuthority.com.