Three Charts that Show How the Trends are A-Changing

Forget about the times. It’s market trends that are A-Changing now … and that could have huge implications for your portfolio!

To see what I’m talking about, check out Chart #1 below. It’s a “spread” chart showing the relative performance of the Energy Select Sector SPDR Fund (XLE, Rated “D+”) and the Technology Select Sector SPDR Fund (XLK, Rated “A”). Focus on the lower-left panel in it. The further the line drops there, the worse that energy stocks are performing relative to technology.

You can see that tech had been blowing energy out of the water since last December. But in the past several weeks, this ratio has shown signs of bottoming out – and it’s now turning (tentatively) higher.

Source: Bloomberg

Then there’s Chart #2, another spread chart that compares the iShares Russell 2000 ETF (IWM, Rated “C+”) to the SPDR S&P 500 ETF (SPY, Rated “B”). You can see from this chart that the larger-cap SPY outperformed the small-cap-heavy IWM for the seven months through early June … but that this ratio is also starting to reverse to the upside.

Source: Bloomberg

Or how about Chart #3, one that compares the yield on the 2-year U.S. Treasury Note to the yield on the 10-Year Treasury Note? A similar pattern is easy to spot.

The difference, or spread, between the two had been shrinking for several months. But now, we’re seeing this key interest rate spread start to widen out again. It’s a tentative development, just like with the other charts I highlighted. Yet it is noteworthy.

So what’s the common message here? Why would energy stocks be starting to perk up, and tech stocks starting to cool? Why would smaller cap stocks be starting to show improved performance relative to large caps? And why would interest rate spreads be starting to widen out again?

It all goes back to the outlook for the economy and inflation. After an initial outburst of optimism following Donald Trump’s election, investor confidence in a growth surge cooled. Even the New York Times ran a story last Thursday titled “Hopes of ‘Trump Bump’ for U.S. Economy Shrink as Growth Forecasts Fade.”

When growth and inflation expectations fade, interest rate spreads narrow. Investors flee economically sensitive sectors like commodities. And they embrace sectors and stocks that can boost sales and earnings regardless of the economic backdrop. That includes tech, which is benefitting from secular rather than cyclical growth.

But in typical fashion, the mainstream media appears to be writing about things just as the markets are signaling a change in trend! The charts above clearly indicate that optimism is creeping back into investor psyches again.

It’s not just rising optimism driving the rotation, either. Important central bank policy developments are also helping things along.

The U.S. Federal Reserve has already raised interest rates four times. Now, it’s also signaling plans to shrink its massive hoard of Treasury and mortgage bonds later in 2017 and 2018.

The European Central Bank (ECB) has lagged behind the Fed so far. But ECB meeting minutes released last week, as well as recent policymaker comments, show that aggressive QE in Europe could soon taper off, too. Benchmark German bond yields surged to an 18-month high in response.

Add it all up and I think you have plenty of reasons to start adjusting your investment strategy. Specifically …

• Start moving money out of growth stocks and into value plays.
• Avoid or dump long-term Treasury, municipal, and mortgage bonds, and rotate into short-term or floating-rate fixed-income bonds, ETFs, and mutual funds.
• Do some bottom-fishing in energy, boost your allocation to financials, and target “growthier” high-yield investments rather than just “safe haven” plays like utilities and consumer staples.

That’s precisely what I’m doing in my brand new service called High Yield Investing. If you’re already on board, look for your next issue later this week. If you’re not, you still have time to do so before my latest picks are released. You can get started by clicking here or calling my customer service team at 877-934-7778.

Until next time,

Mike