Is It Nineteen Twenty-Nine or Nineteen Eighty-Seven? Which Sectors are Out-Perfoming?

In my monthly Intermarket Review this month, I pointed out that, using a 6-week ROC for perspective, the DJIA dropped by 36% on March 20 -before then, there had only been two other instances where the market had fallen by a similar amount from an all-time-high. Based on the DJIA and Friday closes, they were October 1929 (39%) and October 1987 (27%). The two outcomes were completely different, as the 1929 situation was followed by a 40% rally over a 6-month period, which retraced 50% of the crash associated decline. That was followed by the Great Depression and the most devastating bear market in history. In 1987, prices rallied on an irregular basis as the Wall Street crash did not spill over to Main Street. Those lows have never been seen since.

Pondering some more, I thought it might be a good idea to trace the post-crash activity for both periods to see if there were similarities or differences in the sector performance. I also thought that, if there was some pattern to the data, it might be a good idea to compare those same groups in the current situation to see whether their performance looks more like post-1929 or post-1987.

Obviously, data for the 1929-30 period is pretty sketchy, but I do have 14 sectors in my database for that period,  based on monthly closes. Both rallies began in November; since the 1929 retracement rally ended in April 1930, I ranked these industry groups using a 5-month ROC. The same process was repeated for the same period following the 1987 low. The post-November 1929 results are shown in Figure 1.

1929 Sector Recovery

Figure 1

As expected, I found that there was no perfect fit. However, there was a rough pattern of defensive areas doing well in the 1929 bear and underperforming in the post-1987 recovery period. For example, Utilities ranked second in 1929 and gained 35%. In 1987, they ranked thirteenth. Tobacco, a defensive consumer staple, came in fourth in 1929 at +25%, yet ranked way down the list at twelfth in 1987. Consumer cyclicals did poorly in 1929, as Footware came in dead last with a 2% loss and the Retail Composite came in twelfth. In 1987, they ranked second and fourth respectively. Finally, steel was about halfway up the 1929 list but topped it in 1987. In a very general way, I think we can say that the 1929-30 rally was kinder to defensive areas than 1987. It's also true to say that consumer cyclicals and other mid-to-late cycle leaders experienced a better relative performance in 1987. That's understandable, as the economy did not weaken after 1987. But what of today?

1987 Recovery

Figure 2

We know that the 2020 economy is going to be weak, which, in that sense, reflects more of a post-1929 type of environment than that of 1987. However, sector action, as reflected so far in the bounce off the late March lows, leans slightly more to 1987. For example, Footware and Steel topped the 2020 list in the same way they did in 1987.

2020 Recovery (8-days)

Figure 3

Footware is plotted in Chart 1, where the RS line for the Dow Jones Footware Index can be seen to be challenging its 2015-2020 resistance trendline for a potentially spectacular relative breakout.

Chart 1

A long-term picture of the VanEck Vectors Steel ETF (SLX) appears in Chart 2. The relative line recently fell to support in the area of its 2016 low, and the price itself is trying to form a small base.

Chart 2

Chart 3 looks at things in greater detail. It shows that both the price and the RS line could be in the process of forming a small base. That's a real possibility, as the two KSTs are each in an early bullish mode.

Chart 3

Utilities and Tobacco, on the other hand, are performing more akin to 1929, with their recent strong performance and relatively weak 1987 ranking. Third-performing Tobacco is featured in Chart 4. Note that the RS line may well be in the process of completing a 6-month base formation, so, with a small upside push, it could be set for a more sustainable superior performance.

Chart 4

Finally, their current fifth position coming off the lows, places Utilities closer to their 1929 runner-up status than their first-from-bottom 1987 performance. Chart 5 shows that there is nothing to get that excited about, as the RS line has been tracing out a series of declining peaks.

Chart 5

Perhaps that is being influenced by Chart 6, where you can see that the Dow Jones Utility Index, excluding dividends, has just ruptured a 20-year secular up trendline. The sharp drop tells us that it is due for a near-term bounce. The violation, though, warns of a loss of upside momentum, which could be followed by more ultimate downside price action or a multi-year trading range.

Chart 6

Looking at the various sector performances offers limited help in analyzing the current picture, but it does highlight a couple of sectors whose relative action looks promising. That's probably because its not 1929 or 1987. It just happens to be 2020!

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.