Soft assets or hard assets? Banks or base metals? This is sometimes the basic choice for Canadian investors — and it is part of a fundamental investment trade-off throughout known stock market history.

We know the recent version of this story: banks and financial assets enjoyed a record boom in the 1980s and 1990s; since then, it has been hard assets’ turn to star, despite being dented severely in the crash of 2008.

But how sturdy is the resources bull market now? A portion of the sector has faltered, but renewed strength in energy indicates outperformance by resources should continue.

Market action gives the clue to this either/or choice when you analyze the relationship between stock prices or index levels.

The relationship providing this indication is our old friend, relative strength. This is technical analysis at its most elemental, requiring a few calculations to give a clear answer to what is happening. A stock or industry index rising relative to the broader market or another sector in the market is an industry you want your clients to invest in.

In the hard assets vs soft assets debate, it is best to make direct comparisons: the ratio of the prices of, for example, industrial mining stocks or energy stocks to financial stocks. Measured over a period of time, you will see a clear indication of where you should go for superior performance. (See accompanying charts.)

Recently, the financials vs resources answer was mixed. Industrial metals shares are rising strongly against financial shares, but energy shares have been unimpressive relative to financials. In the U.S., though, energy shares have revived powerfully in relative strength since the summer. And because Wall Street typically leads, the Canadian market should soon reflect renewed strength in energy. Conclusion: resources industries continue as preferred portfolio allocations.

The resources sector is not a monolith. Forestry companies’ share prices have climbed, but have only kept in step with an upturn in financial sector prices, leaving the forestry industry’s relative strength little changed.

The U.S. provides the earliest market history of this relationship. In the great bull market of the 1920s, banks were big winners, despite a price rise for base metals and oil shares late in the decade. In the 1930s, out of the depths of the Depression, U.S. resources stocks soared while financial stocks floundered. Resources stocks continued to outperform bank stocks until the mid-1950s.

Canadian stock indices followed a similar pattern though the 1920s and the 1930s. Then, Canadian performance started to differ as the Second World War began. Canada went to war in 1939, while in the U.S. it was business as usual until December 1941. Then, resources industries in Canada (primarily, base metals and forestry) revived. After the letdown at the end of the war, these sectors performed even more strongly vs banks until the resources boom ended in the 1950s.

After Canadian resources stocks rallied in the early 1960s, they slumped in relative strength for 30 years. Energy stocks interrupted this trend when they spiked during the oil crisis of the early 1980s — a forerunner of what was to come a decade later.

The current resources boom dates back to late 1998, but it accelerated in 2001. IE