Leaders-Laggards

Utilities and defensive equities, in general, are and have been indicating steady risk-off conditions for months. With gold looking considerably overbought at this point, I think that longer-term the risk-off play is ultimately going to become Treasuries again, but it’s not clear when the manipulation will end. I still think that the run for precious metals is getting ready to end the more that the yen strengthens.

Volatility in cyclicals turned noticeably higher as the market continues to try to figure out the country’s economic and policy path. With Treasuries getting pushed around by geopolitics, the 6% gain in gold strongly suggests that risk-off sentiment is still in control here. In an environment when long bonds should, in theory, be seeing greater demand, we’re seeing the exact opposite.

The utilities sector was one of the first to signal a risk-off shift approaching and it turned out to be right on. Treasuries are finally having their big risk-off moment. The downside danger of such a top-heavy market is beginning to play out in real-time. High yield spreads blew out by more than 100 basis points during the Thursday-Friday period, marking one of the biggest two-day spikes in decades. This was always the biggest risk in this sector.