“I’m re-reading "How to Trade in Stocks" by Jesse Livermore. In chapter 3, entitled "Follow the Leaders", he says (at page 21) " Today, in 1940, we have only 4 groups in the position of dominating the market: steels, motors, aircraft stocks, and mail orders. As they go, so goes the whole market." So, in 2014, what sectors lead the whole market?”

David Fuller's view

Eoin provided a good answer to this email on Friday, while I was in Edinburgh for a private institutional seminar.  However, it struck me as an interesting question, so I though I would also reply from a slightly different perspective.  It has been about 50 years since I read Livermore’s “How to Trade in Stocks”, which I found informative, despite the fact that he committed suicide after being cornered in an obviously too large short position. 

Livermore appears to have been a compulsive gambler and that lifestyle usually ends badly, because one can seldom live up to the imaging which is created.  There are some interesting articles about him on the internet, including, What You Can Learn From the Demise of Jesse Livermore, by Ryan Deming.

Regarding the email question above, the best time to find out “what sectors lead the whole market”, is by observing market action in the first few months following the bottom of a bear market.  Additionally, these in form sectors may also give early signals of market corrections.  Thereafter, there can be no certainty as leadership inevitably changes over time.  However, bank shares often give a lead to the downside, particularly when serious financial problems are developing.  

In terms of upside leadership, I think technology will remain important, not least as it is so influential.  Also, the very big multinational companies, which I labelled as Autonomies several years ago, are often leaders and particularly those which create and market products for the global middle classes.  I also maintain that the highly cyclical industrial mining sector often shows belated relative strength as bull markets for broader indices are in the late stages of their uptrends.