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 ENERGY BECOME THE SECTOR WITH THE HIGHEST SHORT-TERM UPSIDE?
Utilities (XLU) – Something’s Off
Defensive equity strategies haven’t done much over the past several weeks, but utilities have been the exception. It’s modestly curious that utilities (and gold for that matter) are outperforming as they have while long-term Treasury yields are on the rise. You typically see the opposite relationship, which is why I think this warrants close monitoring. Risk-off sectors outperforming when other signals say they shouldn’t be usually means something’s off.
Industrials (XLI) – Another Positive Catalyst
Last week’s blowout jobs report delivered another positive catalyst for cyclicals, which are outperforming the market in near unanimity. There’s a chance that a hot inflation report this week could dampen sentiment, but that really hasn’t been the case up to this point. The labor market is tight and manufacturing appears to be back on the upswing. Both of those should at least keep investors considering cyclical overweights here.
Materials (XLB) – The Cyclical Reflation Story
The commodities bull looks like it’s only getting stronger here, not just in industrial metals, but also in precious metals and energy. Longer-term, of course, that has the potential to be inflationary, but right now it’s signaling improving demand for materials and investors are buying into the cyclical reflation story.
Financials (XLF) – Positive Trend, But Rates Are A Drag
Of all the cyclical sectors, financials are the only one whose trend hasn’t been pointing straight up, but momentum is still firmly positive. The one thing holding back financials here is the direction of interest rates. Every above expectation economic report seems to push back the calendar on Fed rate cuts, which pushes long-term rates higher. Consumers are already stretched and higher for longer rates will only stretch them further.
Energy (XLE) – Uptrend Accelerating
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