Identifying and evaluating macro trends through the lens of sector performance is a helpful technique to identify historically normal behavior and outlier behavior. The current macro snapshot shows financial markets discounting a more dovish Fed policy in the 2nd half of the year, while sector performance shows us the battle between the bull and the bear over what easing will mean for the longer-term bull cycle’s prospects.
Equities Trend (S&P 500): UP
The S&P 500 has been in consolidation since July, but the long-term bull trend off the 2022 low remains intact. The one violation of the channel in late October of 2023 proved to be an accumulation opportunity. Compared to historical bull trends, the current one isn’t particularly long in duration or notable for appreciation. We think it can continue if the data cooperates.
From a technical perspective there has been some negative momentum divergence in the oscillator work, but we will remain constructive and in favor of the bull trend in our methodology while price for the S&P 500 remains above support at 5119.
From a sector perspective XLK, XLY, XLC, XLRE, XLF and XLI score positively in our model when the US equity uptrend is intact while XLU, XLV, XLP and XLE score negatively and XLB is neutral.
Interest Rate Trend (US 10yr Yield): DOWN
This is where some of the ambiguity starts to creep into the picture. We are on the threshold or an easing cycle with investors discounting some relief for the consumer and various corporate balance sheets (most notably banks which are still recuperating from the trauma of 1Q2023. Based on the chart we expect rates can move lower till support at the 3.23% level. We expect that is where consolidation or reversal could potentially take place.
Historically interest rates moving lower have signaled economic softness and recession. With the Fed trying to learn from past mistakes and telegraphing policy very deliberately in 2024, there is optimism that policy will be applied adroitly and economic weakness will be limited before the salubrious effects of lower rates can improve forward prospects. Nonetheless, as the chart below shows, low vol., high income generating sectors have been clear leadership over the past 3 months. Financials and Industrials have made gains as well. Technology shares and Energy shares have seen selling. The former is the long-term leader and consolidation is likely profit taking. The latter has been weak since the middle of 2022, so continued weakness is not something to tolerate.
Commodities Price Trend (Bloomberg Commodities Index): DOWN
Historically Energy Sector returns have had extreme correlation to commodities and oil prices. Both are in long-term downtrends that have lasted throughout the bull cycle that started in early 2023. The commodities price downtrend inputs as a negative for both XLB and XLE in our Elev8 Sector Rotation Model. We would need to see prices move above the 97 level to close our shorts in XLB and XLE. With the current setup, we favor XLI over both and think being light commodities exposure is the correct way to position for the time being.
Conclusion
Dormant commodities prices are the big standout in the macro picture. Crude and Commodities price indices were showing weakness before consensus coalesced around the direction of Fed. Policy and they have not been invigorated by dovish expectations. We think this sets up either a Growth led recovery or a recessionary scenario. Either way it puts clear headwinds in front of commodities linked sectors.
Data sourced from FactSet Data Systems
