Basic materials has moved impressively higher according to our broad asset ranking tools like DALI or the Asset Class Group Scores pages. For those of us looking to take advantage of this development, we might journey over to the chart page of XLB…. Only to be met with a sub optimal 1.83 fund score. This probably happens frequently for many of you, somewhat frequently finding scores/rankings that disagree with each other and make either seem useless for the purpose of putting money to work. While this can certainly induce analysis paralysis at first glance, it is important to step back and ask yourself: “What is this data point telling me that I can take advantage of?”

When other advisors see that basic materials are improving, they will blindly go and pick up exposure via XLB or in an equal weight fashion via RSPM. This is our first opportunity to go out and differ ourselves from “the other advisors.” In 2025 alone, the top tracked performer in XLB advanced 172%, a stark contrast to the worst performer which lost more than 42%. What if we could maximize exposure to the strong stocks and avoid allocation towards weak names?  To test this idea, we took the tracked holdings of XLB and applied a simple overlay in the custom modeler: Only buy stocks that are “acceptable” by NDW standards, those that earn a TA score of 3 or above. This model, largely due in part to a large Q4 rally, has nearly doubled the performance of broader XLB in 2025 and demonstrates how valuable it can be for you to only focus on those stocks that demonstrate relative strength while others are forced to focus on the entire group. (note: for demonstration purposes we only focused on 2025 in our “backtest”. Note that this strategy decreases diversification and therefore increases observed risk metrics. Selecting fewer stocks may not fit the investment goals for every client.)

Of course, going out and focusing on a smaller subset of stocks won’t work in every scenario. In others, going out and finding the strong options is just a few clicks away. If basic materials are improving but broader funds like XLB aren’t showing a vast improvement in overall fund score, then the logical deduction is that a smaller subset of top performers must be driving the overall gain in strength. Specifically with basic materials, we know the strength to have come from metals, evidenced by Metals & Mining ETF (XME). It holds a 5.65 fund score, nearly 4 points better than XLB. Point being, by taking just an extra 5 minutes of poking around different subsectors, you can utilize NDW’s fund score system to find out where price is on your side… while others are stuck focusing on broad funds that are dragged down by a select few points of weakness.

Remember, today’s process won’t be prudent in every situation. Sometimes, like in healthcare, points of strength can drastically change the risk profile. Ditching exposure to more traditional drug providers in exchange for high octane biotech names can get dicey quickly. Keep this in mind when considering options outside of your run of the mill sector exposure, and as always keep an eye on the charts to be notified when price changes materially.

As investors and advisors, whether we get a positive or negative year from the market can significantly impact portfolio outcomes. With the advantage of hindsight, we know that 2025 has been a positive year for markets. Unfortunately, as we look ahead to the new year, we can’t have the same confidence in whether the S&P 500 will have its fourth consecutive positive year or not. With all that in mind, how does 2025 stack up to other positive years, and which sectors are most sensitive to the market direction heading into 2026?

While the S&P 500 has averaged a 10% return since 1992, it usually performs far better during a positive year. Specifically, if the S&P 500 is positive, it averages a gain of more than 18%. That means that despite the index gaining 16.2% this year, 2025 has been below average for a positive year! The S&P 500 is arguably the most important index, but most advisors allocate beyond broad market exposure. While indices are sensitive to up or down markets, sectors can be more dependent on the direction of the market. Given many investors' tactical allocation, how have the major sectors performed in 2025 relative to other positive years, and how heavily are they impacted by the market’s performance?

While this year has been positive, market leadership has been dominated by technology, as the iShares U.S. Tech. ETF (IYW) is up 25.2%, which is the most of the major sector iShares funds. However, IYW has historically averaged a gain of 31.6% when the S&P 500 is positive, meaning that even tech has underwhelmed compared to other positive years. Looking at the lineup of other iShares major sector funds, in addition to the Fidelity Communications Services ETF (FCOM), technology was not alone in its subdued performance. In fact, only three of the eleven major sectors—communication services, basic materials (IYM), and utilities (IDU)—have exceeded their historical averages in past years SPX was positive.

More broadly, there’s several sectors that stand out as outperformers in positive years, many of which have had a strong 2025. Specifically, the tech, communications, consumer discretionary, and industrials sectors (in that order) average the highest return in positive years—all more than the S&P 500 as well. As a result, investors optimistic about market strength may consider overweighting these higher-beta sectors. Meanwhile, it would be a risk-on sign to see those sectors round out the top of DALI or Asset Class Group Scores’ sector rankings. With Tech, Communications, and Industrials currently sitting at the top of DALI, those sectors should continue being points of emphasis while also signaling greater confidence in the strength of the broader market.

So far, we have been focusing on what the market will do assuming it moves higher. While we’d like to see the market rise each year, that’s not an assumption we can make, unfortunately. When the S&P 500 has declined in a year, it’s usually done so by a decent margin, falling 12.6% on average since 1992. Meanwhile, the previously mentioned risk-on sectors take a larger hit, especially tech and communications, which lose 17.8% and 22.2%, respectively. Technology and communications exhibit the greatest sensitivity to market direction, with performance swings of nearly 50% and 43% between positive and negative SPX years.

On the other hand, Healthcare is the only sector not to decline on average when the S&P 500 falls, averaging a negligible 0.01% gain. Additionally, the energy, utilities, and consumer staples sectors see declines of less than 5%, positioning them as other defensive options during market downturns. Meanwhile, high rankings for these sectors in DALI or ACGS would reflect a defensive posture and signal a potential lack of strength in the market. One exception might be the energy sector, which is often driven more by movement in energy commodities than the overall market. The sector’s annual return has a correlation with the market of only 0.32. Utilities and real estate are the next closest with correlations in the low 0.50s, followed by healthcare and materials in the 0.60s. Conversely, most of the risk-on sectors carry the highest correlation with overall market performance.

Next year’s direction remains uncertain, but the market’s sensitivity to up or down movement can at least provide context on our current environment, offering insight into what next year might have in store. With risk-on sectors continuing to sit in the driver’s seat of the market, those groups should be areas of focus entering the new year, especially as they hold onto the top spots in DALI. However, areas like healthcare, staples, utilities, and energy could be groups to monitor for those cautious of a decline given the sectors’ greater isolation from the market.

Daily Option Ideas for December 22, 2025