From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
One of the main themes we discussed in the Q3 Playbook we published last week is the lack of any directional bias for equities on a relative basis.
We’ve been obnoxious about the trendless environment for equities on an absolute basis... and now we’re noticing a lot of the same play out in many of the relative trends we monitor.
When there is no edge on absolute terms, we can at least try and generate alpha by taking advantage of relative trends through pair trades.
But, right now there’s really nothing out there giving us an opportunity to do so. This is about as rough of an environment for money managers as you’ll find.
All we see is sideways, sloppy, range-bound action… Standard year-two stuff!
To illustrate what we mean, let's take a look at each large-cap sector SPDR relative to the S&P.
We'll start with the “growthy” sectors.
Technology relative to the S&P 500 has been a sideways mess for the past 10 months. There is no clear directional bias in sight until it eclipses those September 2020 highs... or violates the lower bounds of this range ~0.33.
Consumer Discretionary has been posting lower highs and lower lows since the beginning of the year... this is not a leadership characteristic!
Despite holding above former resistance Communication Services has been chopping in a sideways range since March... Another trendless mess.
So how about the value-oriented sectors that led for much of the first half of this year?
In recent months we've seen them give up their leadership roles as these former uptrends have transitioned into consolidation patterns relative to the S&P.
Financials is a good example as this ratio broke out of a nice base earlier this year as the group had been steadily outperforming off the 2020 lows.
Fast forward to today, and this relative trend is testing its breakout level from above as it forms a potential rounding top. Will former resistance turn into support?
If it does, expect more chop and trendlessness. If it doesn't, the bias is lower for Financials on a relative basis.
Similarly, Energy relative to the S&P 500 has gone straight sideways since Q1 as the ratio looks poised to make its first set of lower highs and lower lows any day now.
Very similar to Financials, Industrials are trading at a key support level. Another hot mess...
And here's Materials, trapped in a sloppy range…
What about the defensive sectors -- Are they suggesting a risk-off tone amid all this choppy action? It would certainly make sense in such an environment...
But, we're just not seeing it. Not for now, at least!
Here's Consumer Staples.
They just resolved a continuation pattern lower, in the direction of their primary downtrend relative to the broader market.
And Utilities relative to the S&P 500 looks no different as this safety sector just broke to fresh lows as well.
Staples and Utilities are probably the only sectors with a clear trend in place for our timeframe... But, considering the mixed messages out there we don't exactly want to bet against this group as they are likely to become leaders in an environment where equities, in general, come under further pressure. And there are simply too many signs suggesting this is likely to be the case these days...
Real Estate has been a steady leader during the first half of the year, but it's presently running into a logical level of overhead supply. As long as price is trapped beneath this key former support, there's no directional bias for this group.
Price is likely to continue basing before any sustainable reversal is underway.
Health Care relative to the S&P 500 is also stuck below overhead supply as it consolidates and forms a potential rounding bottom. Like Real Estate, there is still work to do before the risk is to the upside in this relative ratio.
And we're not just observing this trendless action at the sector level... Even when we dive into various factors there is very little for trend followers to lean on.
Here we have High Beta vs Low Volatility. The ratio is in a primary uptrend, however, if we focus on the most recent information price appears to be stalling out and rolling over. Over short and intermediate timeframes this is nothing but a range-bound mess.
And we're even seeing it in the commodity space.
Base Metals relative to Precious Metals have been trapped in a range for over a decade... And there's no sign of it resolving in either direction anytime soon.
What about a recent outperformer like Energy?
Here's Crude Oil vs the S&P 500 trapped below critical former support. As long as this remains the case, there's nothing to see or do here.
Now let's check in on the Bond Market.
High Yield Bonds vs Treasury Bonds are currently holding right below key former support. We at least have a clearly defined level to trade against here, but would have to bet on a counter-trend move in favor of Treasuries.
We prefer opportunities where the primary trend is at our back. And this is definitely not that.
As you can see, the markets remain bifurcated not only in absolute terms but also on a relative basis... There is really no edge for stocks -- or other asset classes, vs their alternatives. This just makes it that much harder for investors to generate alpha.
If there is nothing outperforming the major averages, how can you?
This is yet more information to support our view that this is classic year two behavior within the context of a new bull cycle.
It's not easy out there these days. Things like bonds, cash, patience, and discipline continue to be rewarded. So that continues to be our plan.
We'll always remain flexible and open to new information in the meantime!
Let us know what you think of these sloppy relative trends and as always, please reach out with any questions.
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