Leaders-Laggards

Energy has been on an unstoppable tear for two straight months, but I think stocks are getting a little ahead of themselves here. A healthy U.S. economy combined with higher government bond yields and fresh uncertainties in Asia are developing a perfect storm for dollar-denominated assets. Utilities is trying to make another comeback here and this time it’s being accompanied by other more conservative strategies.

U.S. economic growth expectations somehow keep getting more positive and that has fueled the current cyclical rally with few exceptions. Even though tech gets most of the attention and cyclicals are leading the market higher here, defensive sectors and strategies are starting to make some noise again. If China really is ready to implode soon, it’s easy to make the case that the dollar is ready to move much higher here.

Cyclicals have been leading the market over the past month, but the biggest gains have begun moving beyond just industrials and towards previous laggards, financials and energy. With the macro backdrop deteriorating and fundamentals looking fragile, current risk-on conditions could potentially flip quickly. Utilities might have another leg lower as the final obligatory bounce occurs in equities, but I don’t expect it to last indefinitely.