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: HEALTHCARE & CONSUMER STAPLES BECOME THE MAJOR SIGNALS
Utilities (XLU) – Delivering A Strong Risk-Off Signal
Utilities have made a strong comeback over the past couple weeks in one of the strongest short-term risk-off signals in the entire market. The fact that it’s being confirmed by staples, healthcare, low volatility and value stocks means the defensive strategies are firmly in favor right now. We’ve seen a couple of recent spikes like this sputter out over just the past six months, but this is the first of them to hit with consensus defensive leadership.
Consumer Staples (XLP) – Setting The Table
Consumer staples are taking another shot at leading the market here, even as all attempts to do so in 2023 got rejected and set the table for new lows. This time around, however, this sector has the backing of almost every other defensive strategy, which strengthens its case for this rally having legs. Staples has some reasonable predictive power in suggesting where the upcoming year is headed, as I demonstrated last week, but I’d like to see a little more sustained leadership here first.
Health Care (XLV) – Watch This Sector Very Closely
Healthcare is having its biggest breakout in at least a year and it makes a lot of sense. Due to its pricing power and durability, this sector tends to be a top performer in bear market environments, as was demonstrated throughout 2022. Even better for contrarians, healthcare historically tends to do its best when the market is at its worst, which is why this move is worth watching very closely.
Financials (XLF) – Holding Up As Cyclicals Struggle
Even as other cyclical sectors are starting to break down, financials continue to hold up. Part of this I believe is due to the resurgence of the value trade, but I think investors are also seeing this as a way to play steadily falling rates in 2024. With loan activity slowing substantially and being forced to increase what they’re paying on certain deposits, lower yields will keep easing margin pressures on the balance sheet.
Materials (XLB) – Downtrend Shouldn’t Be Ignored
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