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: TECH FADES, BUT NOTHING IS STEPPING UP IN ITS PLACE
Technology (XLK) – An Opportunity To Return
Tech has underperformed for the 2nd week in a row following its recent tear, but it’s still a very narrow market. Its growth sector counterparts, communication services and consumer discretionary, have been doing better, but nothing in the cyclical or defensive camp is really stepping up in its place. That leads me to believe that tech has an opportunity to return to leadership during a month that is traditionally good for stocks.
Consumer Discretionary (XLY) – Getting Pulled Higher
The macro environment for consumer stocks isn’t improving, just ask Nike and Walgreens. I think this sector is at least temporarily being pulled higher by the rally in growth stocks, which is the only group that has consistently done well in recent weeks. This might be a good example of selling into strength as the fundamentals of the consumer don’t support a rally here.
Energy (XLE) – A Supply Problem
Energy stocks might finally be catching up to the rally in oil prices that has been building over the past month. With U.S. output back on the decline and OPEC actively looking to cap production of its own, this could very well be a supply story over the next year. Even if factory activity and energy demand start to tail off, the lack of supply being pumped into the market might keep oil prices elevated.
Treasury Inflation Protected Securities (SPIP) – More About The Future, Not The Present
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