Ditching Mega-Cap Tech
2023.06.13 15:18
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.
This isn’t a rotation into small-caps; it’s a rotation out of mega-cap tech.
Consumer Discretionary (XLY) – Macro Backdrop Weaker Than the Numbers Suggest
Discretionary stocks () are still getting some favourable tailwinds boosted by a still-tight labor market and a resilient U.S. economy. This looks like a case where the numbers might be overshadowing the real state of the retail sector. More than a half dozen major retailers have already warned about a slowdown in consumer spending. May U.S. retail sales numbers will arrive later this week and are expected to be negative again, which would be the 5th time in the past 7 months.
Communication Services (XLC) – Potential Sentiment Shift
This sector () isn’t experiencing a pullback in the way the tech sector is right now, but it’s reasonable to assume that the behavior between the two will be similar. This group has outperformed the market consistently since Q4 of last year and is probably overdue for a pullback here. The recent tick-up in more defensive asset classes, including utilities and Treasuries, could be signaling a short-term sentiment shift.
Utilities (XLU) – Getting Some Action Again
Utilities () are finally starting to get some action again as the rotation out of tech mega-caps continues. Small-caps are the group getting a lot of attention as the big rotation beneficiary, but this sector, Treasuries and cyclicals are also getting picked up. The fact that all of these groups are starting to tick higher suggests that this is really just a rotation out of mega-caps as opposed to a rotation into small-caps.
Small-Caps (VSMAX) – Not a Durable Move
While the market seems to want to sell itself on the idea of a small-cap rally here, it seems more consistent with a lot of areas of the market outperforming the recently as a result of the rotation out of mega-caps. Relative value is still a big component of small-caps versus large-caps and we’re still not seeing any real outperformance of value over growth. Unless that flips, I’m not sure there’s much of a case that this is a healthy, durable move.
