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: CHINA STIMULUS REWRITES THE NARRATIVE
Technology (XLK) – A More Balanced Market, But Outperformance Continues
Tech is getting a lift as equities remain firmly in favor, but they’re not enjoying the magnificent 7 dominance that they once did. This is now a much more balanced market where cyclicals are getting a longer look as the monetary easing cycle begins. Tech rarely falls truly out of favor as long as equity prices are rising.
Consumer Discretionary (XLY) – Potential To Break Down
Discretionary stocks continue to roll, but this may be due more to sentiment than fundamentals. Job growth has been modest, but trending negatively. Retail sales at a high level look adequate, but we’re still getting warnings from major retailers. There’s some support here as long as recession looks far off, but it also looks like there are several factors that could break at any moment.
Industrials (XLI) – Best Opportunity In Years
Industrials have looked strong ever since the Fed started easing monetary policy and there’s plenty of reason to believe that the momentum could continue. Few sectors are likely to benefit as much as this one following China’s stimulus bomb last week. It’ll take some time to see if that stimulus will produce tangible results, but it’s going to be the best opportunity for this economy to re-accelerate at any point since the financial crisis.
Materials (XLB) – Lining Up To Be A Leader
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.