To The Moon

With tech in trouble (+a number of macro risks lurking on the horizon), defensives are starting to look interesting…

Defensives (i.e. an equal-weighted basket of: Utilities, Healthcare, Consumer Staples) are turning up vs the S&P500 $S&P 500(.SPX)$ —after going through what has been a major relative bear market.

But in particular, the following conditions make for a contrarian bullish (relative) setup for Defensives:

• Defensives’ relative value indicator reached similar levels to that seen at the peak of the dot com bubble (Defensives are extreme cheap vs the index).

• Investor allocations to defensives are ticking up from record lows.

• The market cap weight of defensives reached an all-time low late last year.

• The relative price (black line in the chart below) has seen an extended and extreme period of underperformance.

• And on the flipside, US (tech) stocks $NASDAQ 100(NDX)$ have likewise seen a number of extreme readings on sentiment, valuations, and allocations in the opposite direction (i.e. overall stock market downside risk is higher than we’ve seen since 2000 due to the key growth engine of tech stocks being overheated and looking somewhat burnt out lately).

Interestingly, this bullish outlook for defensive stocks is actually bearish for the stockmarket as a whole…

To be clear, when I say bullish outlook for defensives, I mean in relative terms — i.e. you expect defensive stocks to fall less or at best hold ground while the rest of the market falls more.

In this sense, defensives are interesting to keep tabs on both as a source of information on the market cycle (they fare relatively well in a downturn and lag behind in an upturn), but also as a sort of alternative hedge or portfolio risk dampener.

So seeing the defensives’ relative performance line ticking up from extreme lows (and the contrarian bullish setup for defensives I just outlined) tells us we need to pay closer attention to risk management and smart diversification right now.

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