Very Quietly, Treasury Bonds Are Picking Up Momentum

Mean Reversion Incoming?

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. A falling price ratio means underperformance.

LEADERS: VERY QUIETLY, TREASURY BONDS ARE PICKING UP MOMENTUM

Consumer Discretionary (XLY) – Earnings vs. Sentiment

Consumer discretionary stocks continue to rally on what’s likely to be a solid Q2 earnings season, but it still contradicts what we’ve heard from leadership at the major retailers. Most have warned that consumer spending patterns have weakened and there’s a distinct possibility we start seeing guidance get downgraded.

Technology (XLK) – At Or Near Peak

With the choppy pattern of this chart and long-term Treasuries finally starting to gain a little ground, we could be at or near the peak of this year’s tech rally. This sector is certainly short-term overbought, but this year has been all about sentiment and momentum in the equity markets. Since 2023’s gains have been so narrowly focused, the inevitable breather from this rally could be steeper than usual.

Communication Services (XLC) – Vulnerable To Several Factors

Communication services stocks starting to flatline right at the same time that tech is doing the same suggests that the FAAMG rally has run out of gas for the time being. Alphabet and Facebook alone account for a whopping 46% of this sector, making it extremely vulnerable to any kind of sentiment shift, earnings disappointment or market rotation right now.

Industrials (XLI) – Rotating In

Perhaps the biggest beneficiary of the peak in the FAAMG rally is industrials, which continue to outperform as the economy holds up and even expands in some areas. Given the overvalued nature of tech and some of the improved data we’ve seen recently, it’s not surprising that we’re seeing a rotation from growth back into cyclicals. If the move out of the “super 7” stocks gains steam, industrials could be one of the bigger winners.

Materials (XLB) – Conditions Weak, But Sentiment Improves