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A Bull that looks like a Bear

Posted by nexvucapital on April 14, 2013

The US Equity Markets have been in Bull mode on a performance basis for a considerable period of time but the current leading sectors are those that normally lead when the market is in Bear mode. So what gives? The following chart shows that Consumer Staples, Health Care and Utilities have lead the S&P 500 higher in the first quarter of 2013 yet these are defensive sectors that normally outperform during Bear Markets not when the S&P is making new highs but when the S&P is working toward cyclical lows. While the sectors that usually do well in a Bull Market have lagged.

Sector Performance Q1 2013

We suspect some of this performance is a result of the Fed’s easing and liquidity actions which are designed to reflate housing and equities while keeping a bid under the Bond market and may be pushing reluctant cash into the equity market and this cash is being directed toward defensive sectors. Another possibility is that we are actually at the beginning of the Market Cycle relative to the Economic Cycle. There is evidence of this being the case: (1) consistent retail selling and (2) the Fed is still deep in easing mode. Should economic activity continue to improve we should expect to see those sectors that do well into a Bull Market Top (Energy, Materials and Industrials) begin to outperform. In the first quarter of 2013 those sectors have all sustained losses. Interestingly, early Cycle sectors (Finance and Cyclicals) although under-performing the Defensive sectors posted slight gains in Q1 2013.

Market - Economic Cycles and Rotation

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