New all-time highs are coming next year as a multi-year bull market rally kicks off, a veteran chartmaster says — and these 5 leading sectors look ready to dominate

  • After an 18-month-long bear market, investors should prepare for an extended rally.
  • Long-time technical analyst David Lundgren shared why US stocks are set to take off.
  • Here are the five sectors that will lead the rebound, according to Lundgren’s charts.

David Lundgren, a veteran technical strategist and hedge fund manager, advised his clients to bet against US stocks late last summer. The S&P 500 was enjoying a feverish 17% rebound, and Lundgren’s charts indicated that this was an ideal time to short the index.

About a year after that well-timed bet, the market veteran, who has been in the industry for about three decades, is waving the green flag emphatically for US stocks. According to him, the bear market that began in early 2022 is over, and after a brief transition period, investors will enjoy an 18- to 36-month market rally.

“I don’t see anything in the data that suggests we’re not going to see all-time highs from the market,” said Lundgren, the founder and chief market strategist of MOTR Capital Management & Research, in a recent Insider interview.

Lundgren compared bear and bull markets to chopping wood and setting it on fire. While cutting down trees is a laborious and painful process, it serves an important purpose by providing fuel, according to Lundgren. The same holds true for bear markets, he claims. When stocks fall, they form bases that can later be used to support a rally. According to Lundgren, more wood means a bigger fire.

“That pile of wood is just sitting there waiting for a catalyst, and I think it’s coming,” Lundgren explained. “I believe it will catch fire and spark the next bull market.”

It’s a bold move to call for a massive rally as the calendar turns to September. According to Dow Jones Market Data, this month is the worst for the S&P 500 in the last 10, 20, and 30 years.

Even if the market falls in September, Lundgren believes the path of least resistance for US stocks is higher. Barring a drop below 4,200, the market veteran expects the S&P 500 to rise in the coming months and isn’t concerned about the risk of a pullback.

“Generally, you can eliminate either up or down, and I think you can eliminate down,” Lundgren explained. “Just based on the structure of the majority of charts, the worst-case scenario is that they’re in a base of following an 18-month bear market.”

Why not following the crowd is foolish

Many people are skeptical of technical analysis, which is the process of studying patterns in stock charts to gain insight into what the future holds.

Of course, Lundgren isn’t one of them. He founded MOTR — a combination of his two favorite technical factors to monitor — because he believes that looking at weekly stock charts over multi-year time periods is a proven way to predict what’s likely to happen in the future.

At the same time, Lundgren stated that he is a firm believer in the importance of fundamentals.

“Even though I’m a trend follower and a technical investor, if you asked me, ‘What’s more important: price, trends, or fundamental trends?’ I would say, without a doubt, fundamental trends,” Lundgren said. “Because there are no strong price trends without strong fundamental trends.” So, to me, fundamentals always come first.”

“But what I think you need to distinguish between is fundamentals and opinions of fundamentals, and that’s where I draw the line,” Lundgren continued. That’s why I don’t care what anyone else thinks about fundamentals except the market. Of course, the market’s perception of fundamentals is expressed in relation to trend.”

Any fund manager who believes they can consistently outperform the market is delusory, according to Lundgren. He cited the fact that approximately 90% of active portfolio managers underperform the S&P 500 over the long term as evidence that the crowd often knows best.

“The market knows something we don’t know,” Lundgren explained. “So I’d just ask philosophically, ‘When do we just look internally and say, ‘What are we missing?” and when do we confess or acknowledge that there is wisdom in price?”

Although ignoring price trends and not listening to the market is a mistake, Lundgren acknowledged that while markets are extremely efficient in the long run, they can be irrational at times. But, in the end, the strategist simply stated that good stocks will rise while bad stocks will fall.

“It’s not our job to agree with the market’s assessment of the fundamentals,” said Lundgren. “Our job is to identify the trend and decide whether or not to follow it.”

5 sectors with strong momentum right now

Many investors are still concerned about a potential recession, but Lundgren has learned to rely on market trends rather than his intuition. Bears may be surprised to learn that the parts of the market that appear to be the strongest from a technical standpoint are all economically sensitive.

“The behavioral response to this rally is that everyone wants to sell it because there is a certain impending recession,” Lundgren said. “If you look at the market leadership today, and I say to you, ‘OK, I’m going to grant you a wish: Tell me what five sectors you’d like to see leading today.'”

“I think most people would say some version of: technology, industrials, [consumer] discretionary, energy, materials,” Lundgren continued. Most people would say those five, in descending order. Guess what’s on top today? Those five industries.”

According to chart patterns, stocks in the consumer discretionary, energy, industrials, materials, and technology sectors have momentum and are poised to lead the market higher, according to Lundgren. Others may be left behind by the time they discover cyclicals.

Lundgren said he almost always chooses individual stocks rather than broad exposure to those sectors through exchange-traded funds (ETFs). However, because his LHA MOTR Long Short Fund is private, the hedge fund manager said he couldn’t share stock recommendations.

Investors looking for stock ideas should consider Bank of America’s recent list of 20 companies on which hedge funds are unusually bullish right now. Coincidentally — or not — 11 of the names were from one of the five industries mentioned by Lundgren.

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