Key Takeaway: Despite being dismissed, bad breadth getting worse not better. Defensive groups asserting leadership as risk off trades gain strength. Indexes catching down rather than breadth getting back in gear.
Defensive sectors are perking up on an absolute and relative basis. Utilities, Consumer Staples and Real Estate were all positive last week (Staples even made a new high) and they occupy the top three spots in our short-term relative strength rankings. Staples and Utilities are still longer-term relative strength laggards.
Real Estate remains the top-ranked sector (and is an industry group leader) across the size spectrum.
Key Takeaway: Index-level strength lacks support beneath the surface. Economic surprise index dips below zero. The earnings revision trend is higher though the pace of ascent is slowing.
Real Estate moved into the top spot in our rankings. It was one of four large-cap sectors to make new 52-week highs last week (the others were Consumer Discretionary, Health Care & Technology). No small-cap or mid-cap sectors made even 13-week highs.
Financials have been short-term & mid-term laggards, with deteriorating conditions in Banks across market cap levels weighing on the sector.
Key Takeaway: Indexes make new highs, but action beneath the surface is not encouraging. Equity fund inflows surge in the first half. Bond yields moving lower are unlikely to support equity market strength.
The Energy sector fell out of the top spot in our S&P 500 sector rankings last week, though on an equal-weight basis and at the mid-cap and small-cap level, Energy remains the relative strength leader. Our industry group heat map confirms this broad strength within the Energy sector.
Communication Services and Technology are in the top two spots of our relative strength rankings. Financials and Real Estate round out the leadership group.
Key Takeaway: Indexes made new highs last week, but rally participation has been lackluster. Faltering industry groups and global market trends can make index-level advances short-lived. New breadth thrusts or an Emerging Markets-led rally would suggest downside risks are subsiding.
The Energy sector reclaimed the top spot in the rankings this week, followed by Communications Services (down one spot from last week) and Real Estate (up one spot from last week).
Industrials and Materials have dropped out of the leadership group (which is based on rankings over a three-week span) over the past two weeks. Technology and Communication Services have joined Energy, Financials, and Real Estate in the leadership group.
Key Takeaway: Fed-fueled volatility exposes weakness beneath the surface. Breadth trends at odds with index-level resiliency. Drop-in yields and defensive sector leadership consistent with elevated risk environments.
Last week’s volatility produced a shake-up in our relative strength rankings. Materials and Financials both saw big drops, while Technology and Communication Services surged into the lead.
Looking beyond the cap-weighted S&P 500 sectors shows a less decisive shift in leadership - Energy & Real Estate remain strong, both at the sector level and in terms of the industry group heat map.
Key Takeaway: Index level highs lack support beneath the surface. Bonds rally in the wake of hot inflation data. Households own relatively few bonds, the Fed has never owned more Treasuries.
Health Care moved up three spots in this week’s relative strength rankings, but has yet to crack the leadership group. Industrials sector continues to slip in terms of relative strength.
Both our sector and industry group relative strength studies show Energy and Real Estate as areas of emerging leadership across the size spectrum.
With Consumer Staples and Utilities still near the bottom of the rankings, it’s hard to make the case for a decisive shift toward defensive leadership in the equity markets.
Key Takeaway: US stocks lack momentum while Europe gains strength. Economic recovery moving beyond the US. Bond market not confirming economic & stock market optimism.
The S&P 500 finished last week just three points shy of its highest level on record. Index-level price strength comes with momentum trends rolling over and a domestic breadth backdrop that is not providing confirmation that an upside breakout is imminent. There has been a conspicuous absence of new highs - just last week, the number of stocks making new highs on Friday was below the number making new highs on Tuesday and both of those were well below the early-May peak in new highs. We are also not seeing an expansion in new lows at this point. Rather this muddied and mixed environment is more consistent with a digestive phase than sustained deterioration.
Key Takeaways: Economic data reflects pinched financial liquidity. US price trends are resilient even with momentum and breadth becoming more challenging. Rest of the world is taking on a leadership position versus the US, with developed Europe in the lead.
Key Takeaway: Mixed liquidity backdrop makes rebuilding risk appetites more of a challenge. Tailwinds that have fueled cyclical strength are tapering even if the Fed is not yet ready to. Breadth on a slippery slope from digestion to deterioration to downtrend.
While the indexes themselves continue to hold up relatively well, there is evidence of deterioration that cannot be overlooked from a tactical perspective. Whether this builds into a situation that argues for more defensive positioning from a cyclical perspective remains to be seen.
The market has been messy for a while and we've been reiterating that point for some time now. There are no new signals in terms of a direction, but we thought this is a good time to look at our risk metrics.
When we go through the metrics, we are essentially trying to put them in three buckets. Positive, Negative, and Neutral. Going by the weight of the evidence, we decide which way to go. Leave it all to the charts, they're your map for this treasure hunt.
There are several different metrics that we track on a global and a local level. The goal is to identify whether we are risk-on, risk-off, or waiting. This translates to how liquid one's portfolio could be at a given point.
Index view:
First up, let's take a look at what Nifty 50 is up to. We can see that since February this year, the market has been consolidating. This move has been limited between 15,470 and 14,250. What we also noticed early on was the divergence in the indicator. Momentum was losing steam despite price making new highs. That acts as an early signal of a possible change in momentum. Keep in mind, it is not the sole signal to track.
Key Takeaway: Investors finding themselves with too much Technology exposure. Speculative unwind occurring as neglected areas of the market make new highs. Inflation concerns are overdone in the near term but represent a new reality for the coming decade.
Key Takeaway: Stocks looking at a year two market. Stocks looking at a year of two markets. Economic surprises remain a tailwind for now but data struggling to keep up with expectations.
