The Defensive Rotation Is Here

JC Parets
April 26, 2024

You're finally seeing some of that defensive rotation with Utilities representing the only sector that is hitting new 6-month highs this week.

Here is a chart of Utilities relative to the S&P500, overlaid with Staples relative to S&Ps as well.

As you can see, both of these lines had been falling since 2022, because it's been a bull market.

But now that stocks have been correcting this year, you're seeing that outperformance coming from the most defensive sectors:

I think it's important to take note of the change in leadership.

It's Consumer Staples and Utilities.

Notice how this is happening as large-cap Technology is hitting the lowest levels since January, and Small-cap Technology is hitting the lowest levels since November. See here.

We're incorporating different strategies in this market than we were last year. It's a different environment. Why wouldn't we?

Now here's the thing. We're still not seeing any action from credit spreads.

If this was an "end of the world" situation where the strategy is just to short everything, it would likely be because we're finally seeing stress in credit.

But we're not seeing that at all.

This is why the more delta neutral strategies are far more attractive than aggressively shorting stocks at this point.

Here's the OAS near it's lows for the range, and High Yield vs Treasuries up near the highs of its range:

If there is real stress in the market, you're going to see it in credit.

To be clear, we have not seen it in credit.

The crash in bonds has been anything but a crash. It's honestly been more of a slow grind lower.

Stocks don't hate that.

It's more about the violent bond moves that spook the stock market.

We haven't seen that, at least not yet.

So while we've certainly seen rotation out of last year's leaders and into more defensive areas of the market, so far it's been just that.

No stress in credit at this point.

So we're acting accordingly.

Meanwhile, here's another attractive option that we have as investors right now.

How To Buy This Breakout

We covered everything you need to know about this generational breakout during our 21st Century Gold Rush event this week.

Click here to mine that resource.

As always, if you have any questions about recent price action and what's happening with markets right now, you can always drop us an email.

 

Filed Under