The 200-day moving average has been getting some attention lately. And not because investors are concerned that the stock market could breach this key support level.
It’s because of how far stock prices have climbed above it.
As I write this, the S&P 500 Index is now 17% above its 200-day moving average. That’s nearly four times the average over the past 10 years.
It’s also the most the S&P has exceeded this closely watched level in more than a decade.
Look at this chart…
If nothing else, it’s a sign that markets have gone too far in one direction.
Mean reversion should ultimately set in at some point … like a stretched rubber band getting ready to snap back.
But there’s something that really stands out for me…
The Impact of the Pandemic Hidden in the S&P 500
While the S&P 500 Index itself is trading at extremely overbought levels, 35% of its index members are still down on a year-to-date basis.
I’ve mentioned before that we haven’t seen full participation in this rally in 2020. Tech has led the way, while other sectors have lagged behind.
But as the chart above illustrates, 2020’s winners are getting ahead of themselves. So it might be time to start looking at this year’s “losers.”
That’s because of another signal the market is flashing. In this case, it shows that two industries are in the early stages of a new uptrend.
This Year’s Losers Could Be 2021’s Leaders
Over the past month, the stock market rally is finally starting to shift a bit. Participation has started to broaden.
Most notably, 2020’s laggards have come roaring back. Industries that had been in decline even predating the pandemic are seeing a major uptick in buyers.
Two sectors in particular have captured my attention: oil and pot stocks.
Here’s why.
Stocks in both industries have been stuck in downtrends … for more than two years in the case of oil exploration and production companies!
But both have cleared a key hurdle just recently: their own 200-day moving average.
Just look at the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) to see what I mean. For the first time since October 2018, XOP is trading above the 200-day moving average … that’s the green line in this chart.
Marijuana stocks show something similar.
The ETFMG Alternative Harvest ETF (NYSE: MJ) hasn’t been above the 200-day moving average in well over a year.
Exchange-traded funds linked to both industries have rebounded sharply on heavy volume over the past month.
Putting in a Bottom
While the oil and cannabis industries have faced challenges, investors now realize their stock prices were battered beyond reality … especially considering that things are looking brighter for next year.
Oil companies will be a beneficiary of vaccine distribution and a reopening economy. Current analyst estimates show that energy sector earnings are expected to swing back into the black next year.
And following the presidential election, 15 states now allow recreational marijuana use, while the U.S. House of Representatives just passed a bill to decriminalize cannabis.
That’s why both XOP and MJ have recently traded back above their 200-day moving average, and are in the early stages of new uptrends.
So as 2020 draws to a close and the stock market is being stretched too far to the upside, it’s time to start paying attention to battered industries now turning the corner.
Best regards,
Research Analyst, The Bauman Letter