XLP (Consumer Staples), XLU (Utilities) and XLV (Healthcare) were all up 4-5 % today with nice uptrending price action throughout the day. Not only do most companies in these sectors have strong balance sheets, the sectors themselves have strong secular growth with somewhat stable and predictable financial metrics. These defensive sectors can be thought of as bond-proxies, stocks whose behavior is closest to that of bonds. Now both treasury bonds and investment grade corporate bonds are strongly supported by Fed actions. This is good for defensives, whose earnings yield looks increasingly attractive relative to bond yields.
Defensives held up well initially and only began taking a hit during the recent market decline when Bonds started to go haywire due to risk parity and other liquidations. Now that bonds are strongly bid due to Fed actions, defensives seem to be on firmer ground.
On the other side, cyclical stocks fared less well. The regional banks could not even finish positive on the day while the money center banks barely managed to close in the black. Energy was up only 1%. The NYSE composite, which has a strong weighting of cyclicals lagged the Nasdaq composite. Price action today on most indices consisted of Inside Days on Last Thursday's candle, indicating indecision. Most Indices have still not overcome the 38% Fibonacci retracement of the decline.
Only the defensive sectors - XLP, XLU, XLV made new uptrend highs while not forming Inside Days.
What does this mean? SPX has close to 40% weighting of defensive stocks, and might still advance. But I find it hard to see QQQ and IWM mounting a major advance from these levels without institutional appetite for economically sensitive stocks.
