I’ve opined in this space before about the historical value of watching how cyclical sectors are performing vs. defensive sectors as a gauge of overall risk appetite. The new highs in the S&P 500 have occurred in spite of that and many other historical signals that would indicate a weakening market under the surface. I want to revisit the state of the cyclical vs. defensive sectors today because I do still think the relationship has long term value, but with the caveat that the market has shown strength in spite of such signals so far this year. In other words, these charts usually matter, but they haven’t mattered in the past few months.
I am going to run through a few different cyclical vs. defensive charts to give a flavor of the overall state of affairs. I want to compare sectors vs. the local highs at the start of April, since the SPX index is now 1% higher than that level, but sector-based moves have occurred under the surface.
First is XLY vs. XLP, indicating whether investors are preferring consumer discretionary or consumer staples stocks:
Staples have outperformed since the Apr highs, even with the recent catch up in performance in the past week on the SPX breakout.
Looking at XLU vs. XLE (and I was being generous by using XLE, as XLI shows a more depressed picture for the overall cyclical sectors) paints a similar picture:
Finally, XLV vs. XLF shows that health care is still outperforming financials since the April highs despite the recent strength in financials.
In short, the defensive sectors are all still higher than the cyclical sectors relative to the market highs in April, demonstrating a weaker risk appetite overall than this spring. The markets have tested my faith in my indicators in the past month. They’ve been wrong in predicting future market weakness for the past couple months. At the end of the day, only price pays. But these indicators have served me well in the past, so I will keep them on my radar nevertheless.