Market Breadth Widens, but Extreme Risk-On Has Peaked
XLY
+0.41%
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XLI
+0.56%
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XLK
+1.13%
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XLC
+0.69%
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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.
Consumer Discretionary (XLY) – The Earnings Hurdle
XLY-SPY
A round of better than expected inflation numbers reignited the growth rally and kept investors in a risk-on mood. While this sector (XLY) has been powering higher all year, it’s going to get a big test over the next few weeks. Big retailers have been warning about weaker consumer behavior for months and the Q2 earnings season could let us know if it’s happening. Expectations are relatively elevated for this sector and there is some downside potential ahead.
Technology (XLK) – Rally Continues to Tire out
XLK-SPY
While the tech (XLK) rally hasn’t fizzled out, it continues to show signs of tiring out. Last week’s inflation release brought buyers back into the market again, but we’re still seeing investors spreading their bets out beyond just the growth sectors that have been leading. Tech stocks are up about 40% on the year and are overdue for a breather. Perhaps the upcoming Q2 earnings season is the catalyst if results fail to deliver.
Communication Services (XLC) – Will Facebook Be the New NVIDIA?
XLC-SPY
After flatlining like tech over the past month, this sector got another jolt in the arm thanks to June’s cool inflation reading. This could be an interesting sector (XLC) to watch over the next few weeks. Stocks here are already overbought, valuations are way above historical averages and earnings growth expectations over the next couple quarters are high. That leaves little room for error on multiple fronts and could trigger the pullback that’s overdue.
Industrials (XLI) – Bump in the Road
XLI-SPY
Outside of growth & tech stocks, industrials (XLI) are the one area of the market that’s been consistently outperforming over the past couple months. Obviously, an investment here is a belief that the economic expansion will continue, although other cyclical areas of the economy are still mixed right now. Last week’s downturn is likely just a function of the low inflation rally.
