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: STOCKS RALLY, BUT RISK-OFF SIGNS REMAIN FIRM
Consumer Discretionary (XLY) – Investors See Opportunity
Discretionary stocks have been hanging on to their momentum despite the up and down choppiness of growth stocks. Investors seem satisfied that the combination of controlled inflation, steady consumer spending growth and the idea of impending rate cuts ahead means that consumer stocks are attractive at least for the time being.
Industrials (XLI) – Getting Tougher Before It Gets Better
Cyclical outperformance appears to have topped out for the time being. All of the major sectors have been choppy relative to the S&P 500, but industrials seem to be holding up best. The weak manufacturing data from a couple weeks will continue to underscore the idea that this is a weak operating environment and conditions might be tougher before they get better.
Utilities (XLU) – Despite The Rally, Still A Risk-Off Market
Utilities maintains its firm uptrend relative to the broader market and has actually been distancing itself from the field in becoming the best-performing sector year-to-date. Falling interest rates will no doubt benefit this high debt sector, but overall risk-off sentiment despite last week’s rally is likely going to be the driver. Until this sector, gold and/or Treasuries break down, this looks like a risk-off market.
Health Care (XLV) – Unlikely To Be Done
Defensive strategies are taking a bit of a breather, but are unlikely to be done yet. The market volatility we’ve seen in recent weeks, both to the upside and downside, has been higher than normal. Higher volatility generally leads to lower stock prices in the long run. Healthcare remains a fairly good proxy of market sentiment and if this ratio heads higher again, it would be a pretty strong risk-off indicator.
Consumer Staples (XLP) – Healthy Uptrend
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