Leaders-Laggards

A lack of market breadth, such as what we’re experiencing now, is usually a bad thing as it indicates weakness almost everywhere else. When investors focus on just a half dozen stocks, it creates huge valuation disparities that can trigger potentially violent reversals. Even though Powell dialed back the Fed’s rate cut forecast at last week’s meeting, the markets seem to think that cuts are even more likely than before. Small-caps might be one of the ugliest charts in the equity markets today.

There’s a heavy “magnificent 7” influence here again. If Powell walks back his multiple rate forecast from earlier this year, which seems more likely than not at this point, we could see a short-term reversal in Treasuries unless investors view it as a reason to migrate to safety assets. It’s possible that the year-long leadership from junk bonds is finally starting to end, but it’s still a little early to come to that conclusion.

Utilities finished the month of May as the best-performing market sector despite the S&P 500 and Nasdaq 100 continuing to test new all-time highs. In just the past week and I think investors are genuinely starting to position themselves a little more defensively. Junk bond momentum looks like it’s finally starting to fizzle out. The reverse yen carry trade is a very real risk and I think we may be in the very early innings of a sentiment shift.