Leaders-Laggards

Mega-caps have resumed their position as market drivers, marking a return to the conditions that led to leadership in just a select few stocks. There’s too much going on with other risk-off assets, especially gold and Treasuries, to think that there’s too much strength in this reversal. Treasuries have been on a slow, steady rise over the past several months, but nothing has really stood out decisively as a risk-off moment.

Despite last week’s modest return to normal conditions, utilities are still one of the strongest signals that risk-off conditions are still in control. Long bonds have struggled to make the significant gains relative to shorter-term notes that one might expect during a VIX spike. Lumber/gold isn’t signaling any kind of economic recovery, but more the weakness in housing and construction.

Utilities relative to the S&P 500 is having its best 4-week stretch of outperformance in more than a decade. What just a couple weeks ago looked like a pure rotation within equities has quickly shifted into a stock-to-bond pivot. This isn’t a simple valuation unwind either. This is a massive deleveraging triggered by the reverse yen carry trade.