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Short-term Tilt toward Defensive Areas?

In the past two weeks, stocks witnessed increased market volatility and wide stock market index dispersions. The Dow Jones Industrial Average closed the week below its 50-day ma but rebounded from its 200-da ma. The S&P 500 (SPX) closed just below its key 50-day moving average but has quickly rallied above the key moving average. The Nasdaq Composite Index (COMPQ) fell below its 50-day ma, and the Nasdaq 100 Index (NDX) found support near its 50-day ma.

Investors and traders seem to have pared back risks, at least near-term, amid uncertainties of the new omicron variant, inflation fears, and the Fed tapering program. Small-caps (IWM) and Micro-caps (IWC) witnessed the sharpest of declines as they plummeted 13% and 15% from their respective highs, closing well below their 50-day and 200-day moving averages.


In the past couple of weeks, risk aversion has developed in the financial markets. It first appeared in the junk bond market during Sep-Oct 2021 timeframe and then again during Nov 2021 sell-off as JNK and HYG sold-offs. Money shifted into safe-haven fixed income instruments such as Treasury bonds (GOVT and TLT).


As market uncertainties increased, the S&P 500 Implied volatility index (VIX) also jumped as professional investors hedged their portfolios by buying defensive puts. A breakout above pivotal resistance at 29-32 led to a rally to a 10-month high at 35.32 before pulling back toward the high-20s. The last time the VIX jumped this sharply occurred during Feb 2020, ahead of the Covid-19 pandemic induced lockdown.


However, not all markets sold off during the past two weeks. Surprisingly, the strong rebound on 12/6/21 resulted in the defensive and income-related sectors outperforming SPX (+53.24 or +1.17% gain). For instance, defensive and income-related sectors such as Consumer Staples (XLP +1.26 or +1.76%), Utilities (XLU +1.03 or 1.53%), S&P 500 Dividend Aristocrats (NOBL + 1.29 or +1.38%), and Real Estate (XLRE +0.69 or 1.14%) have performed well in the past fifteen trading days. Two dividend growth names – Procter and Gamble Co. (PG) and PepsiCo, Inc. (PEP), are also currently trading near their all-time highs.


The shift toward these defensive and high-yielding sectors may be a flight to safety move by investors. But it can also be the result of many consumer staples stocks successfully passing their costs to the end-users. Income-related securities such as utilities, real estate, and dividend growth names that can consistently increase their yearly dividends will outperform fixed income instruments, notably, as the dividend increase offsets rising inflation.


The bull market remains constructive over the intermediate-to-longer term. However, the cross-currents in recent weeks have spoked traders and investors, at least from near-term perspectives. So, the question we face - is this another buying opportunity? And should investors ignore the chaos surrounding the Fed tapering, the Omicron variant, and rising inflation?


If history is any guide, the dominant and prevailing uptrend should return. But maybe not as fast as many expect based on the changing moods of the investors as they react instantly to every headline news. Until buying returns in full force with the broader market breadth and active participation, we recommend investors and traders remain disciplined with the full knowledge that any technical bounces may be temporary.

See the attached Relative Rotation Graph (RRG) study of the 11 S&P sectors for technical evidence that XLU, XRE, and XLP have attracted investment interests over the past fifteen trading days ending Dec 6, 2021. Also enclosed are the charts of PG and PEP and their relative strengths as depicted by recent technical breakouts to new record highs.


See the attached Relative Rotation Graph (RRG) study of the 11 S&P sectors for technical evidence that XLU, XRE, and XLP have attracted investment interests over the past fifteen trading days ending Dec 6, 2021. Also enclosed are the charts of PG and PEP and their relative strengths as depicted by recent technical breakouts to new record highs.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com




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