Market and Macro Technical Observations
By TRG Advisors on May 11, 2023
There are a few unique relationships occurring in today’s market environment due to the considerable number of macro crosscurrents. While Q1 earnings have been much better than expected, price reaction has been relatively muted. We are paying close attention to the macro and company comments.
Below are examples of potential leading indicators within the current market environment. Overall, there is a defensive tone in the marketplace. Companies capturing secular trends are keeping pace, while weak companies are showing their cards.
Chart 1: Homebuilders vs. Home Depot[1]
The Homebuilders ETF has performed in line with Home Depot (HD) over the past year. Yet HD has fallen year-to-date, relative to the S&P 500, while the Homebuilders ETF continues to rise. Homebuilders are benefitting from secular housing trends, while HD is reacting poorly to soft retail sales. Traditionally cyclical sectors, like consumer retail, autos, banks and transports have all recently underperformed. Homebuilders, along with industrials and perhaps energy, buck the trend due to secular themes.
Chart 2: Industrials vs. Health Care[2]
It is rare that you see health care and utilities, traditionally defensive sectors, correlate strongly with industrials, a traditionally cyclical sector. Industrials are outperforming, not on cyclical factors, but due to inelastic demand trends. Secular momentum includes the bipartisan infrastructure bill and semiconductor industry CHIPS Act; supply chain bottlenecks also delayed new fleets and innovative tech-embedded equipment, which is now available.
Chart 3: Copper/Gold Flashes Signs of Economic Weakness, Defensiveness[3]
The gold/copper relationship breaking down indicates that investors have decidedly begun to protect assets by buying gold, rather than bet on continued cyclical momentum by buying copper. Copper is a representative commodity for the overall economy because of its broad use in building, utility and communication infrastructure. Gold/copper divergence is viewed as an economic warning sign, similar to yield curve inversion in the bond market.
Chart 4: BLK vs. Financials Sector[4]
BlackRock (BLK) tends to lead on the way up, when financials begin to rally, and also lead on the way down, when financials begin to fall. Most recently, BLK has fallen -9.9% over the past month, while the financial sector is +0.1%. BLK may be viewed as a leading indicator for broader financials, particularly amid the volatility and challenged industry across brokerage, capital markets, money management and trading, alike. JP Morgan (JPM) is the only quality financial we find that has acted well over the past month and represents a safe-haven for investors who want to maintain industry exposure, but take on less risk.
Chart 5: Broad Price Weakness, Limited Momentum in S&P 500[5]
Less than half of the S&P 500 is priced above its 200-day moving average. This indicates a lack of momentum, especially as 78% companies were above their 200-day moving average just three months ago. This is especially surprising, given the strong earnings beats for Q1. At the end of last week, 85.5% of the S&P 500 had reported earnings and 74% of companies beat estimates. Earnings are beating estimates by 7.1%, but price reaction has been muted.
Selective Investing
Investing is not about timing the markets but, rather, about being purposeful in selection and allocation. Today’s environment perfectly emphasizes how there are opportunities to outperform by selecting companies capturing real demand, which are executing on quality, pricing and end-market strategy. Active positioning across sectors (e.g., defensives and secular tailwinds) and actively selecting names within sectors (e.g., high quality, pricing power, healthy end-markets) can support long-term relative outperformance, despite overall market weakness.
- Source: FactSet (chart). As of May 10, 2023.
- Source: FactSet (chart). As of May 10, 2023.
- Source: FactSet (chart). As of May 10, 2023.
- Source: FactSet (chart). As of May 10, 2023.
- Source: FactSet (chart). As of May 10, 2023.