Leaders-Laggards

As market breadth expands, defensive issues are picking up some momentum again. Financials have very quietly become the best-performing sector of the year. Small-caps are understandably digesting some of their recent gains here, but momentum still looks like it’s on their side. A number of signs are still lining up for a flight to safety trade, but it’s been a very slow process.

I think outperformance of the utilities sector might be one of the stronger signals that the small-cap rally will fade in the near-term. This was unquestionably an historic rally for small-caps, but the issue now turns to sustainability. This broader stock market rally at the expense of mega-cap tech has not triggered a big move in Treasuries. I don’t think it's a coincidence that the decline in tech stocks correlated with the rally in the yen.

The markets clearly didn’t like the implication for expensive mega-cap names based on the data and the path of rates, but we’re not necessarily looking at an imminent correction yet. If last week did mark a turning point for U.S. stocks, the potential for small-caps relative to large-caps is HUGE. Even though Treasuries moved higher last week, we’re still not seeing any conviction in either direction.