Despite impressive year-to-date numbers, most equity sectors (along with many other assets classes) have been range bound since the Q1 rebound from the Q4 sell-off, writes Landon Whaley.

Despite the business media’s (think CNBC) belief that markets are chocked full of opportunities every day, the reality is that markets spend the majority of their time rudderless. Directional moves in markets only occur about 15% to 25% of all trading days; the remaining 75% to 85% of the time markets go nowhere, in cumulative terms, which is why we call it “The Chop.”

While the broker led media (i.e. Old Institution) is out there touting all the markets with double-digit gains this year, those gains have obscured the true pattern in markets. The reality is that markets ripped out of the 2019 gates after the Q4 2018 carnage, but then entered, and remained, in The Chop.

Here in the U.S., 15 of the 22 equity sectors we track have gained double digits so far this year, but most have stalled (from a cumulative return perspective) for the majority of 2019, here’s just a sampling:

  • U.S. small caps are up an impressive 15.9% but have been chopping along since Feb. 19 (eight months).
  • Transports charged higher for the first four months of the year but have been doing a sideways hustle since April 12 (six months).
  • Industrials are up 22.0% but have doggy paddled at roughly the same price since April 24 (six months).
  • Basic material stocks are up 15.3%, but after three months, they are still trading at their July 1 price.

U.S. equities aren’t the only ones dealing with The Chop; it’s a global phenomenon!

In South Korea, the Kospi started the year on a tear, but it has been trending sideways since Jan. 16. Chinese equities (Shanghai Composite) have treaded water since Feb. 25.

The Chop doesn’t just occur in stocks, long-dated Treasuries have chopped since Aug. 5, nearly three months. The U.S. Dollar Index has been in a holding pattern since July 23. And in the commodity space, crude oil has been mired in The Chop since Feb. 19, and copper hasn’t moved (on a cumulative basis) since Jan. 25.

Global bond and currency markets aren’t immune to The Chop, look at the Japanese yen (10 months), Aussie dollar (five months), German bunds (five months), or the Canadian 10-year government bond (seven months), just to name a few.

So why do we care about The Chop?

Most of the world’s money is “long-only” and trend following in philosophy, which means the majority of capital allocators are always looking for markets they can buy and hold for a prolonged bullish move. The implications for the remainder of 2019 and the beginning of 2020 are clear: whichever market(s) breaks out of The Chop on the upside will see a massive amount of capital flow its way, helping perpetuate that market(s) bull run.

In tomorrow’s release of our “Headline Risk” commentary, we identify two of the markets most likely to break out of The Chop and lead markets higher as we close the books on 2019 and begin to traverse 2020.

Please click here and sign up to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of two weekly reports: Gravitational Edge and The Weekender.