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Welcome 2020: Market Indicators for the New Year

We’re off to a strong start in 2020, but many are asking ‘Can this rally last?’. Nasdaq Dorsey Wright Monthly Update takes a close look at market indicators moving into Q1.

With the turn of the calendar to a new year, and new decade, we close the books on one of the strongest years for the US equity market in the past decade.  The S&P 500 (SPX) was up nearly 29% in 2019, the second best year in the 2010s, second only to 2013’s return of just over 29%.  2019 was also a year that saw all broad sectors produce gains, with nine out of the 11 broad sector SPDR ETFs posting gains greater than 20%.  The top three sectors, using SPDR ETFs as proxies, were technology (XLK), communication services (XLC), and financials (XLF), returning 47.90%, 29.92%, and 29.22%, respectively. Energy (XLE), on the other hand, was the worst performing sector on the year with a return of just 4.69%. Energy has now been the worst performing sector in five out of the last six calendar years.

NDW January Chart 1

Source: Nasdaq Dorsey Wright

The big question on many investors’ minds today is, “Can this rally last”?  If we look back at last three years in which the S&P 500 (SPX) had gains of 20% or more, which were 2003, 2009, and 2013, the average return in the following years (2004, 2010, and 2014) was 11%. With that said, we will remain diligent and watch our indicators. 

Markets were remarkably resilient in 2019, seemingly shrugging off almost every major geopolitical risk, including fears of a China/US trade war.  As we head into 2020 we are faced, once again, with potential conflict in the Middle East. However, thus far the markets have remained resilient.  So, as we turn to our Dynamic Asset Level Investing (DALI) tool, which provides us with a “heat map of the market,” identifying leadership trends across as well as within asset classes. From a relative strength perspective, the US equity market remains atop the leader board.  As a matter of fact, over the course of 2019 US equities extended its lead over international equities, which is currently second, followed by fixed income and commodities. 

As we drill into the different asset classes, there are some clear leadership trends to pay attention to.  First, from a style perspective, growth continues to dominate.  Secondly, from a sector perspective, technology reigns supreme with industrials, financials, and communication services rounding out the top four.  Also of note is energy at the back of the pack.

NDW January Chart 2

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As we move into 2020, we want to continue to overweight our portfolios to favor the areas of leadership in the market. In many instances, this will not require us to make significant adjustments as many of these trends, especially the strength of US equities, have been steady over the past few years.  With that said, one area of the market that has seemingly flown under the radar has been the commodities market.  While crude oil has grabbed headlines of late, which is unsurprising given the recent activity in Iran, gold has been the more stable trend within the commodities/alternative space recently.

Below is a chart of the SPDR Gold Trust (GLD), which moved back into a positive trend in February 2019 and has remained so since then. Over the course of the past year, shares of GLD have risen to a recent high of $148.  While GLD didn’t quite keep up with US equities in 2019, it did manage a return of nearly 18% in 2019 and continues to show a positive technical picture as we head into 2020.  So, while we would continue to favor equities over commodities/alternative, gold is one area that is technically sound and can provide a bit of diversification and an inflation hedge to client portfolios.  We will continue to monitor these trends as we move through 2020, especially with the upcoming presidential election which may have significant implications for both domestic and international markets.

NDW January Chart 3

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Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value.

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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.

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