Stock Market Update: Defense Still Reigns Over Offense

At a bear market bottom, you usually see leadership from two key FAANG sectors: Technology and Consumer Discretionary.  As investors move to a more risk-on positioning, defensive sectors like Consumer Staples and Utilities begin to fade as the offense emerges with renewed strength.

So what are the sectors telling us in 2022?

Before we go there, let’s talk first about market breadth.

The cumulative advance-decline line for the NYSE shows the trend in stock movements over time.  See chart below.

s&p 500 index advance decline line analysis bear market chart image

This key breadth indicator has achieved a new low every month in 2022, as the majority of stocks remain in established downtrends.

Conclusion: the market trend remains lower.

Now let’s relate that message back to sector movements.  Is the offense or the defense on the field?

xly xlp etf trading ratio consumer stocks analysis chart

The top panel on this chart shows the relative performance of Consumer Discretionary versus Consumer Staples.  We’re using the cap-weighted ETFs which means that the XLY is dominated by three stocks: AMZN, TSLA and HD.

The bottom panel corrects for this issue by showing the equal-weighted ETFs for these two sectors.

Note how the equal-weighted ratio has made a new low every month since December 2021, including another new low this week.

Conclusion: the defense remains on the field.

In today’s video, we’ll look at Sam Stovall’s idealized model of sector rotation, why offensive sectors like Technology should outperform defense such as Utilities as a bear market reaches its end, and why MSFT may be the most important chart to watch!

  • What can sector rotation tell us about the risk appetite for investors?
  • What sectors should we be watching now to indicate a potential end to this bear market phase?

Why is Microsoft (MSFT) the important stock to watch right now?

Ready to upgrade your investment process?  Check out my free course on behavioral investing!

(VIDEO) S&P 500 Current Analysis and Past Performance – Sell In May?

Twitter:  @DKellerCMT

The author may have positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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