An Unexpected Year for Outperformance/Alpha
Premium Section: What is The Market Cycle?
2026 is setting up as an excellent year to outperform the market and generate alpha. That only happens if you ignore clichés like “no one can time the market” or “active managers always underperform,” and instead follow a disciplined process.
Our Process
Our process is straightforward:
Uptrends: Own investments in uptrends. This is where capital compounds. Buy this pattern:
Downtrends: Stay out of investments in downtrends. This is where capital is destroyed.
Sideways: Avoid them investments chopping sideways. This is dead capital and opportunity cost.
Macro and Fundamentals: Catalysts and narrative provide the fuel for sustained price trends. Always know what’s happening in the global economy and how Wall Street is positioned.
Cycles, Seasonality, and Market Internals: These factors provide a timing edge and often determine whether capital is deployed or held back.
Here is a real time illustration: iShares Select Dividends ETF “DVY” became a buy in 2026 when it started an uptrend and as money rotated from offensive sectors (tech & growth) to defensive sectors (utilities, consumer staples & dividends). From a Macro perspective this represents the broadening out of earnings growth and from a Fundamental perspective these companies had lower/attractive valuations.
What Do We See Now?
Rotations are keeping the broader market resilient. However, it remains a bifurcated market with clear winners and losers. The StockCharts Sector ETF CandleGlance view illustrates this best below:
Here’s what we see:
The Broad Market: The S&P 500 (SPY, second row, second from the left) is stuck in a choppy sideways range, as Wall Street rotates out of growth and technology and into value, cyclicals, and defensives. Generating returns in this environment is difficult and requires near-perfect timing.
The Winners: Consumer Staples (XLP), Utilities (XLU), Real Estate (XLRE), Energy (XLE), Materials (XLB), and Industrials (XLI) are clear winners and can be owned with a positive expectancy. Healthcare (XLV) may turn into an uptrend, however it needs to display strength over the next few trading sessions.
The Losers: Technology (XLK), Communication Services (XLC), Consumer Discretionary (XLY), and Financials (XLF) are in downtrends of varying degrees and should be avoided, as downtrends lack positive expectancy and often result in losses or opportunity cost.
The Advance/Decline Line remains in a strong uptrend, tilting the odds in favor of continued strength in the ongoing rotations.
Macro: From a Macro perspective inflation came in cooler than expected, as non-farm payroll (jobs) were greater than expected. This implies lower inflation and supported growth (as people have jobs), which are favorable conditions for the economy.
Fundamentals: Last week Cisco (CSCO) earnings had a weak profit margin outlook which caused a selloff in tech stocks. There is also a new fear that AI will disrupt brokerages and money center banks so financials got hit.
Market Internals: Market internals are mixed but not signaling a broad selloff. The McClellan Breadth Oscillator is holding a higher low, supporting continued strength in the leading areas of the market. The McClellan Summation Index remains positive, reducing the risk of a broad liquidation. Net new highs persist, keeping the tape constructive for equity traders.
The VIX is modestly elevated above 20, likely reflecting hedging ahead of key economic releases including unemployment, CPI, and next week’s Core PCE and GDP. The VIX curve is forming a higher low after resetting from overbought levels, a constructive setup for another advance.
The put call ratio shows elevated put buying, which can favor the bulls as dealers are disincentivized from allowing those positions to profit. SPY is holding support near the 100 day simple moving average, while bearish momentum is becoming oversold based on stochastics.
Bottom line: despite recent volatility, probabilities still favor another up leg.
Smart Money is heavily buying the recent weakness as they have been sitting on the sidelines. As they continue to buy, support levels should hold.
The Fear & Greed Model is waffling in the middle of the range. A double bottom may be forming and if this leads to a new leg higher, the market could rally.
The AAII Sentiment Survey shows a sharp rise in bearishness, with AAII Bears reaching 38.1%, above the one-year average of 31%. This is constructive for bulls, as markets often move opposite to prevailing expectations.
Seasonality is favorable, as both the sixth year of the presidential cycle (red forecast) and the second Republican midterm year (green forecast) show a tendency for a strong uptrend from mid-February through mid-March.
Q1 of a midterm election year is usually fairly stable. However, volatility in midterm years typically emerges in Q2 and Q3.
Despite weakness in certain pockets of the market, we believe the rotation rally should continue.
In the premium section, we’ll walk through the market cycle as defined by W.D. Gann, the godfather of cycles.
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.