Sector Breadth as Market Return Indicator

Does breadth of equity sector performance predict overall stock market return? To investigate, we relate next-month stock market return to sector breadth (number of sectors with positive past returns) over lookback intervals ranging from 1 to 12 months. We consider the following nine sector exchange-traded funds (ETF) offered as Standard & Poor’s Depository Receipts (SPDR):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

We use SPDR S&P 500 (SPY) to represent the overall stock market. Using monthly dividend-adjusted returns for SPY and the sector ETFs during December 1998 through August 2019, we find that: