Defensive stock A makes a new high. Defensive stock B makes a new high. Defensive stocks A and B both make a new high.
That’s the gist of the new high headlines over the past few months. The same applies for defensive sectors in addition to individual stocks. Staples, utilities, and health care (XLP, XLU, and XLV respectively) are all trading at multi-year highs. Meanwhile, none of the major cyclical sector ETFs have made a new high since May.
Part of the reason why I have developed a general bearish posture on the broader market over the past few months is because of the unstoppable strength in defensive sectors. That price behavior develops as large money managers shift their stock positions from cyclical to defensive as they prepare for an economic downturn. It has occurred ever since the U.S. stock market has existed. And here’s how it’s looked in the past year:
In the last year, these 3 defensive sectors have driven SPX performance. They are up an average of 13% vs. 5% for the SPX. Given that they make up about 30% of the S&P 500 index, the cyclical sectors have contributed almost nothing to the price appreciation of the index in the last year. More importantly, though the SPX is back to where it was in early May, the cyclical sectors are all down since then, and the defensive sectors are all up.
This is price action that throughout history generally portends lower stock prices as a whole. As long as this broader picture persists, placing bearish bets on cyclically exposed names makes the most sense to me.