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: THE TREASURY BULL FINALLY ROARS
Utilities (XLU) – Unusual Strength
With such a strong market rally last week, it would make sense to assume that utilities were a major laggard, but that wasn’t the case. This sector largely kept pace throughout the week, which makes me think that there are still some risk-off undertones here. This could be a case of interest rate sensitive sectors, such as this one and real estate, gaining some extra benefit from falling yields, but I think this trend is worth keeping an eye on.
Technology (XLK) – Proving Resilient
Even as earnings results for the mega-cap growth names were a mixed bag, the tech sector as a whole has proven resilient and is leading the market once again. Apple was somewhat disappointing, but investors were quick to move past that at the end of last week. There’s always been a segment of investors willing to treat large-cap tech as a quasi-safe haven, but they’re also willing to pile on when conditions are right as well.
Communication Services (XLC) – Needs An Expansion Of Gains
Even after the Q3 earnings season disappointment from the sector’s two heavyweight names, this sector is still on a fairly durable and steady uptrend. Given how deeply the sector underperformed from late 2021 to the end of 2022, it’s tough to say that there isn’t room for further upside. It will, however, need to see some gains beyond just Facebook and Alphabet. The equal weight version of this index has deeply underperformed by more than 30% so far this year.
Energy (XLE) – Positive & Negative Catalysts
There are a lot of catalysts pulling this sector back and forth as evidenced by the choppiness of this ratio. The response to the Middle East conflict seems to have settled and brought crude oil prices back down again, but last week’s labor market numbers can’t be encouraging. Slowing global demand has been a big concern for this sector throughout the year and a labor market contraction would fuel this narrative.
Bonds (GOVT) – A Lot Of Upside Potential
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