As of Friday’s close, the S&P 500 has now gone 21 consecutive trading days without an “outlier day” (trading day beyond +/-1.50%). This marks the longest streak of consecutive days without an outlier since November 2021. The market is trading more efficiently and rationally than it has in the last 18 months. An outlier or two would not be unusual at this point, but nonetheless, the declining frequency of outlier days is positive for the market.
The chart below shows the number of outlier days for 2021, 2022, and so far in 2023. Calendar year 2021 was a low volatility, efficient market. As a result, it experienced the expected number of outlier days for an efficient market (about 10 – 20 outliers). Calendar year 2023 was a bearish, inefficient market and experienced 75 outliers. So far in 2023, the S&P 500 has had 10 outliers, but the extent of those outliers has been less severe and the frequency of them has declined.
Right now, the top ranked S&P 500 sectors, according to Canterbury’s risk adjusted rankings, are Consumer Staples, Information Technology, and Communications. Real Estate, Energy, and Financials round out the bottom ranked S&P 500 sectors.
There are two charts below. The first chart shows the percentage of the number of stocks within each sector that is either in a Canterbury Bull Market State (low risk), a Transitional Market State (rising or falling risk), or a Bearish Market State (high risk). The top ranked sectors mentioned above all have a high percentage of stocks in a Bullish Market State, while the bottom ranked sectors have a high percentage of stocks in a Bearish Market State.
The second chart shows the percentage of the market capitalization within each sector that is either in a Canterbury Bull, Transitional, or Bearish Market State. So, in other words, not all stocks are weighted equal. Stocks like Apple or Microsoft, which are in the Information Technology S&P sector, have a much larger impact on the sector’s movement. In this chart, a larger capitalized stock would be allocated a greater percentage (ex: if Apple is in a bullish Market State, and represents 20% of the sector’s weight, then 20% of the sector would be bullish).
As you can see from the chart directly above, most of Information Technology’s and Consumer Staple’s market capitalization is in a Bullish Market State. One thing to point out is that Financials, the largest sector in terms of number of stocks, had most of its stocks in a Bearish Market State, but most of its market capitalization (the big banks) is in a Bullish Market State. This would imply that while most financial stocks are bearish, a few of the larger financial stocks are not.
The Consumer Discretionary sector is at a critical point. The sector ranked 8th out of the 11 S&P 500 sectors on a risk adjusted basis. Surprisingly, the sector’s percentage of stocks in a Bullish Market State was actually the third highest of any sector. Yet, most of the sector’s market capitalization is bearish. This is because most of the sector’s market capitalization is tied up between 2 stocks: Amazon and Tesla. While 31 of the 53 stocks within the sector are in a Bullish Market State, Amazon and Tesla are both in Bearish Market States and represent the largest portion of the sector.
The chart below shows XLY, the Consumer Discretionary ETF. With this sector, the war between supply and demand is getting tighter, with both sides refusing to surrender. The chart shows a declining resistance trend line drawn across the sector’s relative peaks, as well as an ascending support trend line drawn across the recent lows. These two trend lines meet at the ETF’s current price, which is the same point as two moving averages (the 50-day and 200-day moving average). This looks like a loaded spring, where one side will eventually overcome the other. The question: will it be supply or demand?
Here are a few positives to this market environment. First, the frequency of outlier days is decreasing. While in 2022, the S&P 500 averaged an outlier once in every three days, that number has declined significantly to begin this year, and the market’s current streak without an outlier is twice as long as any streak it saw last year. Additionally, the outlier days have been smaller. That is a sign that trading is becoming more rational, and less exuberant.
Looking at the individual stocks, nearly half of the S&P 500’s components are in a Bullish Market State, while 60% of the market capitalization is in a Bullish Market State. This is much improved from what was seen just a few short months ago.
Canterbury continues to monitor for any changes in market environment or global sector rotations. Right now, international stocks continue to lead domestic equities. As somewhat of a surprise economically, the Home Construction industry has been the highest ranked US industry. The Portfolio Thermostat has held a position in Home Construction for the last few months.
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