You cannot strengthen the weak by weakening the strong.
--William J. H. Boetcker
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.
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LEADERS: STILL NOT GOOD
Financials (NYSEARCA:XLF) – Sloppy
: Financials continue to try to lead, but the ratio is having a hard time reaching its mid-September level as QE3 was announced. The trend has been sloppy on the upside, but for now it remains intact.
Health Care (NYSEARCA:XLV) – Surge Continues
: Leadership in health care remains a concern in the very near-term given risk sentiment, which appears to be deteriorating. The move has caused the ratio to touch June levels before the broader stock melt-up began. The problem here is that the ratio should have probably fallen further during the melt-up, making continued outperformance a troubling sign for near-term risk sentiment.
Consumer Staples (NYSEARCA:XLP) – Defensiveness Persists
: Consumer staples continue their strength in sympathy with Treasuries, health care, and utilities, as money takes itself off the table following the Fed's QE3 announcement. The surge is troubling, and may be warning of a potential correction in equities for October. LAGGARDS: MANY MORE WEAK PERFORMERS
Energy (NYSEARCA:XLE) – Downward
: It appears that energy continues to try to find a trend as its recent underperformance causes its relationship to the S&P 500 to fall back to early September levels. It is curious to see that energy stocks have not surged further given open-ended monetization by the ECB and the Fed. It appears that reflation is not being confirmed in the here and now.
Small-Caps (NYSEARCA:SLY) – Broken
: Small-caps continue to underperform in a meaningful way. It appears that QE3 has not spurred animal spirits in higher beta stocks, and the trend remains down for now until more clear and comfortable risk-taking occurs. The ratio may retest the June 4 low.
Technology (NYSEARCA:XLK) – Destroyed
: Technology has gotten destroyed in recent days relative to the S&P 500 on Apple
(NASDAQ:AAPL) manufacturing concerns, and a general feeling of profit taking relative to the broader market. The trend remains down and severe weakness could persist into earnings season.
Market internals continue their trend of deterioration entering into earnings season. Could a correction be averted if markets like earnings announcements to come? Absolutely – but for now, caution remains warranted.
No positions in stocks mentioned.
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