These stock market sectors should be strong if the bulls really are in control — but they’re not.


It’s still a bear market, according to the U.S. stock market’s sector relative strength rankings. That’s because the sectors that typically do the best at the end of bear markets have been laggards of late. Conversely, the sectors that usually do the worst at the end of bear markets have been outperforming. This is not what we would be seeing if this bear market were living up to historical norms.

This doesn’t guarantee that we remain in a bear market. The indicators are mixed, with some suggesting that a bull market began at the October lows and some pointing to the bear market being alive and well. That’s why analysts have been leaving no stones unturned in a search for additional clues.

According to data from Ned Davis Research, the S&P 500

sectors that most consistently outperform over the last three months of bear markets are Communication Services, Consumer Staples, Health Care and Utilities. The firm based this finding on an analysis of the 14 bear markets since the early 1970s. Each of these four sectors outperformed the overall market in 13 of those 14 bear markets.

Unfortunately for those who believe the bear market ended at the Oct. 14 low, these sectors were not at the top of the rankings for performance over the three months leading up to that point. In fact, three of the four lagged the market, according to data from FactSet. Health Care was the only one of the four which outperformed the market over that three-month period.

A similar story is told by the sectors that most consistently lagged the overall market at the ends of past bear markets, as you can see from the chart above. Consider the Industrials sector, which over the last three months of the 14 bear markets since 1970 lagged the S&P 500 in 12 of them. Yet this sector was one of the better relative performers over the three months leading up to the Oct. 14 low.

The Financials and Materials sectors almost as consistently as the Industrials sector underperformed the S&P 500 over the last three months of past bear markets — with each lagging in 11 of the last 14, according to the Ned Davis Research data. Yet, like Industrials, both of these sectors outperformed the market over the three months leading up to the Oct. 14 low.

Consumer discretionary vs. consumer staples

Another sector-related clue to which analysts pay attention is the relative performance of the Consumer Discretionary and Consumer Staples sectors. The former contains companies that tend to do well when economic times are good, while firms in the latter sector produce essentials that consumers must purchase even when times are bad.

Not surprisingly, the Consumer Staples sector tends to outperform the Consumer Discretionary sector during bear markets. But this quickly reverses at the beginning stages of a new bull market. That’s when investors begin to sense that the worst is behind them, and when they start to favor the consumer discretionary stocks that should do well in subsequent months.

This helps to explain why there was a burst of bullish excitement over the past two weeks of November. Over this period, for example, the Consumer Discretionary Select Sector SPDR

handily beat the Consumer Staples Select Sector SPDR

by the margin of 5.2% to 1.9%.

But this outperformance didn’t last. So far in December the Consumer Discretionary sector has forfeited all of that outperformance, and then some.

The bottom line? The sector relative strength rankings suggest the bear market is still here. This doesn’t guarantee that the U.S. market’s October lows will be broken. But if you want to believe that we’re in a new bull market, you will have to find reasons to support your belief other than sector relative returns.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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