Leaders-Laggards

Despite last week’s modest return to normal conditions, utilities are still one of the strongest signals that risk-off conditions are still in control. Long bonds have struggled to make the significant gains relative to shorter-term notes that one might expect during a VIX spike. Lumber/gold isn’t signaling any kind of economic recovery, but more the weakness in housing and construction.

Utilities relative to the S&P 500 is having its best 4-week stretch of outperformance in more than a decade. What just a couple weeks ago looked like a pure rotation within equities has quickly shifted into a stock-to-bond pivot. This isn’t a simple valuation unwind either. This is a massive deleveraging triggered by the reverse yen carry trade.

As market breadth expands, defensive issues are picking up some momentum again. Financials have very quietly become the best-performing sector of the year. Small-caps are understandably digesting some of their recent gains here, but momentum still looks like it’s on their side. A number of signs are still lining up for a flight to safety trade, but it’s been a very slow process.