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One worry about the stock market has been that its star sectors have been utilities, telecoms and other defensive plays, but that concern may be fading.
Analysts are now highlighting the strength shown by tech XLK, -0.02% , financials XLF, +0.12% and other “cyclical” stocks. Such sectors are generally associated with boom times, rather than tough economic periods.
“Over the last month, the highly cyclical sectors such as technology, materials, and financials have seen very large gains,” says Jonathan Krinsky, chief market technician at MKM Partners, in a note dated Sunday.
Meanwhile, consumer staples XLP, -0.11% , telecoms XTL, -0.50% , utilities XLU, -0.04% and bonds BND, +0.01% have begun to sell off, he adds.
Krinsky’s note offered the chart below to highlight the moves:
MKM
“The rotation beneath the surface from defensive to cyclical sectors is constructive, and therefore we maintain our bullish view,” writes Krinsky.
He recommends buying relatively strong individual financial stocks, including BB&T BBT, -0.16% , J.P. Morgan JPM, -0.30% , BlackRock BLK, -0.82% , Schwab SCHW, +0.43% , Discover DFS, +0.29% , MasterCard MA, -0.10% and Visa V, -0.24% .
Strategists at Bank of America Merrill Lynch have also pointed out the change.
“Sector leadership has shifted from defensive, high-dividend-yielding bond proxies to financials/tech/EM,” say BAML’s Michael Hartnett and Brian Leung in a note on Thursday. “EM” EEM, +0.71% refers to emerging markets, an area that often fares well when investors are in “risk-on” mood.
The recent rally by cyclical stocks might not continue, however.
“The cyclical sectors showed a strong rebound in July,” but the shift in market leadership should not be extrapolated further, say J.P. Morgan strategists in a note on Monday. Key catalysts are now behind us, they add.
There were better-than-expected second-quarter earnings, but they failed to inspire more confidence about the rest of the year, and Citi’s economic surprise index appears to have peaked, write J.P. Morgan’s Mislav Matejka, Emmanuel Cau and other strategists.
“We advise that one should start fading the cyclical move and return to our core preference for defensives,” they say.
Earlier this summer, betting on defensive U.S. large-cap stocks was described as the world’s most crowded trade. What’s more, the big gains by defensive plays back then suggested that many were bracing for a recession or a bear market.
On Monday, U.S. stocks were trading little changed after the S&P 500 SPX, -0.09% rose to an intraday record out of the gate.
