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: FORGET TREASURIES; THE DOLLAR HAS BECOME THE SAFE HAVEN TRADE
Health Care (XLV) – Lack Of Conviction
This sector continues to meander without giving much indication of market sentiment. I noted last week that, while this sector tends to outperform in risk-off environments, it doesn’t usually provide a good signal that we’re headed in that direction. Chartists may look at activity in this ratio over the past few months and conclude that a breakout/breakdown is coming, but I’m not seeing a lot of conviction in either direction.
Communication Services (XLC) – Reversal Risk
There’s still no stopping the steady outperformance from this sector. It’s interesting that this growth-tilted sector isn’t demonstrating nearly the volatility that tech and discretionary stocks are right now. Facebook and Alphabet, which account for nearly half this sector, are clearly driving the returns here. I’m not sure how much longer that will be sustainable and this runs the risk of a sharper than average reversal.
Energy (XLE) – The Cartels Are In Control
Energy stock prices are likely to continue following the trajectory of oil prices, which is to say they’re probably going to keep moving higher. The cartels seem highly interested in keeping crude prices higher for longer and are willing to choke off supply however they need to. The market consensus at the moment is that oil prices will eventually move above $100.
Financials (XLF) – Are Banks About To Get Squeezed?
If utilities are moving sharply lower here due to the impact of rising rates, it stands to reason that financials might be next in line to take a hit. It shouldn’t be lost on investors that three of the worst performing sectors last week - utilities, financials and real estate - are all interest rate sensitive. If rates continue to rise at the magnitude they have been, bank stocks could get squeezed.
Treasury Inflation Protected Securities (SPIP) – Little Changes Seem Big
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