Sector Rotation: Either Big Gains Or A Market Crash Over The Next 2 Years

We’ve looked at the U.S. stock market’s sector rotation recently. Our conclusion was simple: sector rotation is usually a short term and long term bullish sign for the stock market.

We can look at this sector rotation in another way.

Last week, the Dow (large caps) went up >2% while both the Russell 2000 (small caps) and Nasdaq fell.

This is rare. This has only happened 7 other times from 1987-present.

Here’s what happened next to the S&P 500 (historically).

As you can see, even in the worst case scenario (year 2000), the stock market does well over the next 3 months.

Here are the S&P 500’s returns over the next 2 years.

Conclusion

This study is very interesting. Notice the divergence in cases.

1. 5 historical cases SOARED over the next 1-2 years.
2. 2 historical cases CRASHED over the next 1-2 years (this was the dot-com bubble top).

In other words, the markets will either soar for another 1-2 years or the bull market’s top is already in. There is no middle ground.

Based on the previous sector rotation study, I think another 1-2 year rally is more likely.