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: TREASURY MOMENTUM FINALLY GETTING READY TO TURN
Utilities (XLU) – High Conviction Signal
Utilities continue on their tear relative to the S&P 500 and it remains one of the strongest risk-off signals in the market right now. This alone would be an indication that investors should remain very cautious, but the fact that it’s being confirmed by other defensive sectors & strategies almost across the board increases the level of conviction.
Consumer Staples (XLP) – The Pivot Is Real
Consumer staples have officially joined the party after failing to confirm the current risk-off move for a few weeks. Dividend strategies are only starting to catch up to other defensive investments, so there’s likely still some built-up buying opportunities to be leveraged. I said several weeks ago that this was the one sector that really needed to lead in order to feel comfortable concluding that the risk-off pivot is the real deal. We’re getting just that.
Health Care (XLV) – A Disappointing Week
While healthcare traditionally does well in bear market environments, it’s doing anything but at the moment. The choppy, sideways pattern that’s been on display since the beginning of last summer culminated in big losses last week. Price performance has been a little disappointing considering that the Q3 earnings season has generally been pretty good, but uncertain outlooks have capped upside.
Technology (XLK) – Still Hanging On Despite Risk-Off Shift
While the tech sector broadly has been holding up relatively well compared to the broader market, the performance of Facebook and Alphabet has to be concerning. With large-cap index gains this year being driven by just a half dozen stocks, there was always a built-in risk that any disappointing news could be dealt with harshly. It hasn’t happened to a major degree in tech yet, but Apple earnings this week could be the catalyst.
Communication Services (XLC) – Dropping The Hammer
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