From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridg
Money really likes to flow where it’s treated the best… and as far as sectors and even most industry groups go, there simply isn’t much alpha out there at the moment.
In analyzing relative trends, we’re always aware of how the overall stock market is performing against defensive assets.
In today’s post, we’re going to check in on those sectors investors pile into when seeking safety as opposed to positioning for risk.
Utilities, Real Estate, and Staples… the “bond proxy” groups. Let’s dive in.
Here’s a custom index of them all charted relative to the broader market.
Notice how the relationship has stopped trending lower since it bottomed back in July.
While many of these defensive groups had been in freefall versus the S&P, as JC discussed in this month’s conference call, it’s interesting to see them trying to build out a bottom here.
We could argue the same is true for other defensive alternatives such as the Yen, Bonds, and Gold.
But, to be clear, by no means are these new uptrends. If anything, they’re a pause in the primary downtrend or, at best, the beginning of a reversal. Like most things, they’re just sloppy for now.
The thing to remember about these ratio charts is that, when the stock market is under pressure, it’s normal to see these risk-off sectors outperform. At the same time, when the market is trending higher, we tend to see these groups lag behind.
For now, they’re just chopping around, so there’s really nothing concrete to lean on. That’s been the case with most relative trends this year.
With so little directional bias, we’re best served evaluating each chart and each group on its own merit and not overthinking the intermarket picture. Sure, there are pockets of strength in certain sectors on an absolute basis, but that’s nothing new.
What we don’t have are clear leadership areas on any meaningful timeframe. Tech would be the closest.
As for the defensives, they’re just something to keep an eye on for now. It’s one data point. And they only just stopped going down. If we start to see higher highs and higher lows versus the S&P, that could be problematic for stocks in general…
But that’s not the bet we’re making right now considering the bullish developments that continue to unfold.
On balance, the evidence remains mixed. What else is new?
Let us know what you think, and, as always, reach out with any questions.
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