Relative Strength Favors Defensives: Truth of The Tape

As markets struggle to find direction, although have a bearish hue, analyzing industries and sectors on a bottom up basis surfaces potential opportunities. A matrix approach to relative strength analysis is clearly tilted in favor of defensives, in particular staples and healthcare. More importantly, tech and discretionary are at the other extreme and clearly lack absolute and relative strength. Equally, Financials and Industrials are also looking wobbly.

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Aside from a defensive bias amongst sectors, even asset class views show momentum in favor of defensives - treasuries and gold. Additionally, style bias is now distinctly moving from growth and momentum to value and quality.

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Dips are buying opportunities till they are not - the current episode, for now looks like a top - unless we get a clear breakout about 6150-6175. The appropriate strategy is to add defensives, harvest elevated volatility and buy hedges.

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Relative Strength Matrix Favors Defensives

• Rather than looking at each of the sectors vs. the broader market, we analyzed relative strength using matrix approach that compares each sector with the other. Staples are universally leading all other sectors with healthcare and utilities close behind. Importantly, growth sectors, technology in particular (especially if we extract tech names from communications and discretionary) are clearly lagging substantially.

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Relative Strength Matrix

source: Lighthouse Canton

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