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: HAS CHINA SUDDENLY BECOME THE MARKET WITH THE BIGGEST UPSIDE?
Technology (XLK) – No Longer A Dominant Force
Tech is no longer the market leader it once was. The economy is perceived to be back on the upswing, which tends to play more favorably for cyclicals than growth stocks. If the soft landing becomes reality, tech will no doubt get scooped up in the rising tide, but with valuations already at a premium and the macro landscape starting to tilt away from the sector, tech may only be positioned to be a market performer here.
Consumer Discretionary (XLY) – Still A Level Of Support
The labor market was the one big question mark when it came to helping confirm the soft landing. Last week’s job report was that confirmation for many, but that took the gas out of several recent winners. With retail sales still looking good at a high level and sentiment quite positive at the moment, there’s probably a floor under this sector in the near-term.
Industrials (XLI) – The China Catalyst
Cyclicals are still holding on to their momentum as the latest data continues to feed the narrative. The most impactful development here could be the massive stimulus package from China, which will hopefully improve consumer behavior and revive the struggling manufacturing sector. Global manufacturing is still weak worldwide, so the rally here is based on the perception that activity is on the upswing, not stalled out.
Materials (XLB) – Choppy But Positive
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