The Dow is outperforming, which could be a sign that the latest stock market rally is about to die down

See: Dow on track for record October as Big Tech tanks: What’s next for stocks as investors await Fed clues

“I don’t think we’re in for a sustainable rebound,” Krinsky said in a phone interview with MarketWatch.

“People are trying to catch up, but more defensively.”

First, Krinsky said periods of Dow outperformance during the early stages of an equity rally are incredibly rare in the past four decades of financial market history. He cited four “new bull markets” – 1982, 2002, 2009 and 2020 – as examples.

He cited 2002 as a particularly notable example. As then, US equities were caught in a cycle where the Dow’s outperformance margin continued to widen.

Krinsky compared this with a similar pattern that emerged before US stocks finally fell to post-dotcom lows in late 2002.

While defensive stocks have outperformed previously popular sectors such as information technology or consumer discretionary, professional investors have increasingly offered them to their clients.

The other day, UBS Group Chief Investment Officer Mark Hafaele reiterated that he advised his clients to favor defensive sectors like healthcare stocks and consumer staples, while avoiding stocks of growth like technology.

“We remain the least favorite on [information technology] and growth,” he said in a note.

This year, Dow’s outperformance trend began in the first quarter, when weak big tech earnings sent shares of Netflix Inc. NFLX,
+3.15%,
Meta Platforms Inc. META,
+1.06%
and their peers in shock.

But it has intensified recently. The Dow outperformed both the Nasdaq Composite COMP,
-1.12%
and S&P 500 SPX,
-0.89%
in five of the past eight weeks, according to Dow Jones Market Data. And in the eight-week period that ended Nov. 4, the Dow has outperformed both rival benchmarks in six of the past eight weeks.

A similar pattern emerged in the period leading up to mid-June, when stocks finally fell to their lowest levels in more than a year.

By the time the October stellar run for stocks was over, the Dow Jones was up just under 14%, posting its strongest October performance on record. Additionally, it beat the Nasdaq Composite by 3.7 percentage points, the widest margin since 2002, and the S&P 500 by nearly six percentage points, the widest margin since April 1999, according to DJMD.

One of the reasons the Dow is doing so well right now is that it is heavily comprised of defensive stocks. As Krinsky, UnitedHealth Group Inc. UNH, pointed out,
-1.60%,
Goldman Sachs GS Group,
-0.73%,
Home Depot Inc. HD,
-2.55%,
Amgen Inc.AMGN,
+0.10%
and McDonald’s Corp. MCD,
+0.32%
are responsible for more than a third of the value of the Dow Jones.

Consumer staples, utilities, health care stocks, large telecommunications stocks like Verizon and AT&T (although they haven’t performed as well lately), and some types of investment trusts real estate are generally considered defensive stocks, market strategists said.

So far this year, defensive stocks have performed well, along with energy stocks, which were by far the best performers of 2022. The S&P 500 energy sector is up more than 70% since the beginning of the year, and Chevron Corp. CLC,
+0.05%
is the best performing Dow Jones, up 60.5%.

Although all three major benchmarks ended lower on Monday, the Dow outperformed again, falling 0.6%, compared to a 0.9% decline for the S&P 500 and a 1.1% decline for the Nasdaq year-to-date, the Dow has fallen just 7.1%, compared to 17% for the S&P 500 and 28.4% for the Nasdaq.