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: DECISIVE MARKET SIGNALS ARE GETTING HARDER TO FIND
Consumer Staples (XLP) – One Of The More Decisive Risk-Off Signals
If you look at the performance of consumer staples relative to discretionary stocks and low volatility relative to high beta, you get one of the more decisive risk-off signals in this market. Both defensive themes have been outperforming throughout most of 2023 and show little sign of reversing. I’d feel a little more confident about this signal if utilities were telling the same story, but the length of this trend stands on its own merits.
Financials (XLF) – Challenging Environment For A Rally
The failure of First Republic over the weekend demonstrates that the issues within the banking sector might not be done yet. It’s important to remember that the failures that have occurred thus far were banks with degrees of uninsured deposits and potentially more aggressive lending practices. It’s still not an industry-wide trend, but it’s likely to do enough damage to investor psyche to encourage a big rally here.
Technology (XLK) – Mega-Caps Are Masking Weakness
Tech stocks got a big boost last week from positive mega-cap earnings reports, but that may still be masking underlying weakness. The cap-weighted tech sector gained 2% last week, but the equal-weighted tech sector lost 1%. As was the case during the post-COVID rally, a handful of mega-cap stocks are driving this market. It’s not as strong as it looks.
Communication Services (XLC) – Big Positives On The Earnings Front
Alphabet and Facebook, which together account for nearly half the weight of this sector, delivered on the earnings front and provided the fuel to extend the current uptrend. The positive news on the ad spending front suggests that companies aren’t necessarily slowing down growth plans despite economic challenges.
Treasury Inflation Protected Securities (SPIP) – Not Finished Yet
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