Tech Begins To Lose Its Grip
And Financials Remain Vulnerable
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 BEGINS TO LOSE ITS GRIP ON THE MARKET
Technology (XLK) – Investors Moving Away?
Even as the market rallies here on the combination falling inflation/Fed pause theme, it really hasn’t been tech that’s been leading. Growth isn’t dead, but there has been rotation happening, particularly into cyclicals. It’s way too early to say that there’s a sentiment shift in this sector, but it is interesting to see that in November, what could end up being the best-performing month for the S&P 500 this year, tech is having trouble keeping up with the broader market.
Consumer Discretionary (XLY) – Holiday Shopping Holds The Key Right Now
Despite the warnings that the consumer is weakening, retail sales numbers have largely suggested that we haven’t seen that yet and discretionary stocks are responding. We’ll obviously be getting perhaps one of the year’s best indicators in Black Friday/holiday season spending figures, which could end up being lower than last year. If this number shows disappointing demand, it could be trouble for this sector.
Communication Services (XLC) – Breadth Needs To Improve
Communication services might make it through the entire calendar year without a significant stretch of underperformance, but we know that’s mostly due to the performance of just a pair of stocks. Those two heavyweights aside, the rest of the sector is still relatively weak and gains need to spread out much further than they have to carry the next leg.
Financials (XLF) – One Of The Most Vulnerable
Bank stocks have gotten a nice bump from the decline in interest rates, but the macro backdrop still looks very weak. The commercial loan market is deteriorating, particularly on the real estate side, and credit slowly continues to contract. The combination of lower rates and a tight labor market might sustain this sector for a little while, but the overall picture suggests this is one of the most vulnerable areas of the economy right now.
Long Bonds (VLGSX) – Still Driven By The Fed