Enis’s Macro Wrap – Defensives Still Strong

by Enis June 15, 2012 7:45 am • Commentary

The news that dominated the trading day yesterday was the central bank coordinated action headline from Reuters.  It was an otherwise quiet overnight session, with Asia and Europe following the U.S. rally higher.

As usual, my preferred type of analysis is to see what the market tells me rather than speculating on headlines.  The top 3 performing major sector ETFs yesterday were XLE, XLV, and XLP.  So 2 out of the 3 were defensive, which is quite rare on a 1% up day on the SPY.  On a longer time frame, defensives continue to look strong.  In my CotD last month, I introduced the XLU vs. SPY relative performance indicator as a measure to watch for market turning points.  Let’s revisit it here:

Take my word for it that the XLV and XLP vs. SPY charts look quite similar.  Importantly, while the SPY has recovered back to its trading levels from mid-May, all of the defensive sectors (XLU in the chart above) have actually outperformed the broader market in the last month.  Investors are positioning for future market weakness, whatever the central banks decide to do.

As I’ve said before, obstinacy is the strength of the weak, and there is no reward for being stubborn if we’re wrong.  But when I look at cross market currents, like relative sector performance above, or reduced breadth on the up-moves (which I’ll show with an indicator in my chart of the day for today), I don’t see a good reason to change my mind yet.