Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.
LEADERS: DEFENSIVE STRATEGIES BUILDING SOME MOMENTUM
Communication Services (XLC) – Threatening To Break Down
Growth sectors are beginning to perform very inconsistently. Communication services had been holding up in the latest rotation, but are threatening to underperform again. The trend hasn’t necessarily been broken yet, but this would be a negative sign for the market if the final growth sector starts breaking down.
Industrials (XLI) – The China Wild Card
Industrials have been one of the strongest areas of the market and continue to demonstrate that cyclicals are mostly in control here. Last week, I noted that the calls for soft or no landing could keep powering this sector higher, but the rapid deterioration in China could be a wild card. Their economy is struggling mightily on its own and any drag-down effect from the real estate sector could hit manufacturing hard.
Materials (XLB) – A Good Read On The Market
Despite a nice stretch for commodities, the materials sector has disconnected from some of its cyclical counterparts. This is probably an accurate read on current conditions since the environment for additional building and construction is probably about to be severely impacted if it isn’t beginning already.
Financials (XLF) – Ready To Get Dragged Down By Real Estate
Higher interest rates are good for financials at the margins, but if the cost of deposits is outpacing interest income on loans, conditions are actually getting worse. Evidence suggests that this is what’s happening now and stocks may be reacting to this. Financials are also closely linked to the real estate sector and that’s unlikely to help heading into the tail end of 2023.
Energy (XLE) – Overdone & Setting Up To Fail
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