The market and our client accounts continue to grind higher in the early stages of this quarter. If historical measures could serve as a guidepost, the outlook for the market is strong. Since 1945, when the market has been up in January and February, it has finished the year positive all 27 of 32 times with an average gain for the rest of the year of 11.48%.

Since 1950, in years when the S&P finished 8% or higher in the first half, the second half of the year has averaged 7.1%, and the second half yielded positive returns 84% of the time. (21 out of 25 times).¹

While this data might not carry the weight of a true forecasting tool, it does tell us to respect the momentum of the market, at least over the short run.

A Divided Market Means Opportunity

FAANG stocks, along with many market leaders in technology, healthcare, Chinese shares, and select industrials are moving sharply higher. Investors continue to drive the prices of these leaders higher. Business prospects for these companies are bright and the stocks are responding. Nvidia (+54%), Amgen (+20%), Alibaba (+71%), and Boeing (+25%) are noteworthy gainers for 2017.

Favorable price trends are not universal, however, as some areas of the market are downright ugly. Energy, auto, retail, and telecom shares languish in the investor penalty box. Exxon (-13%), O’Reilly Automotive (-34%), Foot Locker (-43%), Verizon (-28%) serve as examples of brutal bear markets.

This bifurcation of the market where strong areas are accompanied by weak areas can become exacerbated. The strong stocks become stretched and extended to the upside while the weak ones can become overly discounted as investors generally overreact to short term news.

Eventually, these trends will reverse. Investors fall into the trap of believing a trend will be everlasting. When this type of mindset takes hold, it leads to good opportunities to invest in companies that may be neglected by investors. These depressed companies may have hidden value that can emerge at a later time.

If the positive market trend is going to continue into year-end, like historical evidence suggests, it is likely that some change in leadership will occur. Some of the current leaders will take a breather and the lagging areas will rebound.

(1) Market historical data provided by Bespoke Investments

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