Whatever else we can say about recent tech-sector weakness — and there is no shortage of commentary on the subject — I doubt it’s signaling an imminent bear market.
That should provide some solace to nervous bulls for whom memories of the bursting of the internet bubble are still fresh in their minds. Up until the last couple of days, of course, this sector had been leading the market higher, nearly doubling the 12-month return of the S&P 500 (.SPX).
But, then, on Sept. 5 the sector suffered its worst day in over a month. And it was one of worst performing sectors on Sept. 6 as well, setting up the tech-heavy Nasdaq Composite (.IXIC) to have its worst week since March 23.
In fact, as you can see from the accompanying chart, the tech sector has been slipping in relative strength for three months now.
To be sure, these developments support the emerging narrative that a bull market comes to an end when its previous highest-flyers start to crest and then fall.
But my analysis of past bull market tops shows that this narrative is false. The worst-performing sectors in the last three months of past bull markets are almost never the ones that were at the top performers in those bull markets.
In fact, that’s never been the case since the mid-1970s. Furthermore, at no time in the past five decades was the top-performing sector in a given bull market the worst-performing sector in the first three months of the subsequent bear market.
I base these conclusions on data from market researcher Ned Davis Research. The data included S&P 500 sector rankings in each bull market since 1974, along with sector rankings for the last three months of each of those bull markets, as well as during the first three months of subsequent bear markets.
Take the bull market from Oct. 9, 2002, though Oct. 9, 2007. That bull market ended, of course, just as the Great Financial Crisis was beginning. The top performing S&P 500 sector in that five-year bull market, according to Ned Davis’ data, was Energy, with a 27.9% annualized return. If the “higher they rise, the harder they fall” narrative were true, then we would expect that this sector would have been abnormally weak in the last few months of that bull market or in the first of the subsequent bear market.
But neither was the case. Energy actually was a top performer for the last three months of that bull market, in second place in fact among the 10 S&P 500 sectors. It also was a strong relative performer in the first three months of the subsequent bear market, also in second place.
Nor was this experience in 2007 a fluke. The same overall pattern was the case in every other bull market since 1974.
To be sure, there are plenty of things about this market that should worry investors. Tech-sector weakness isn’t one of them.
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