The year 2023 has been marked by its fair share of market volatility, and investors are understandably on edge as they ponder whether the recent stock market pullback will escalate into a full-fledged bearish downtrend.
To gain insight into the market’s trajectory, many have turned their attention to the dynamics between cyclical and defensive stocks.
In this blog post, we’ll explore the current state of the stock market and the key factors to watch for signs of a potential bearish trend.
The Current Stock Market Landscape
As of now, the U.S. stock market appears to be experiencing a relatively typical pullback.
However, seasoned Wall Street macro analyst Jeff deGraaf, Chairman and Head of Technical Research at Renaissance Macro Research, has offered some valuable insights into what could lie ahead.
The S&P 500 index recently hit a new 65-day low, and there are signs of deterioration in the year’s uptrend.
According to deGraaf, the market is likely to test the large-cap benchmark’s 200-day moving average (DMA), which is roughly 3% below its current level. He suggests that the 200-DMA could serve as a support level for the downside.
However, the real concern lies in the relationship between cyclicals and defensives.
Cyclicals vs. Defensives
Cyclical stocks are those most sensitive to economic cycles. They thrive when the economy is booming but can struggle when economic conditions weaken.
On the other hand, defensive stocks tend to provide more stability during economic downturns but may not offer the same growth potential as cyclicals.
The recent surge in Treasury yields, with the 10-year note reaching a 16-year high, is causing cyclical stocks to feel the pressure. DeGraaf believes that rising yields could spell trouble for the performance of cyclical stocks relative to defensive stocks.
So far, there has been some weakness in the cyclical vs. defensive trade, but the bullish relative trend remains intact. DeGraaf emphasizes the importance of closely monitoring this trend for any signs of a breakdown.
However, he cautions against hastily rotating into defensive stocks, as the charts suggest that they may not be poised for significant gains.
A Focus on Midcap Staples
While the overall defensive sector may not be a clear winner in the current market environment, deGraaf highlights one area within defensive stocks that has shown strength – midcap staples.
These stocks have quietly made new highs within a basing pattern, indicating potential opportunities for investors seeking a defensive position.
Market Performance
As of the time of writing, U.S. stocks have experienced a notable decline, with the S&P 500 shedding 1.5% and trading near 4,273. The S&P 500’s 200-day moving average, a key indicator for long-term trends, stands at 4,194.68.
The index has retraced about 5.5% from its 52-week high set on July 31, 2023, but it still maintains a year-to-date gain of approximately 13%.
The Dow Jones Industrial Average has also experienced a decline, down approximately 400 points, or 1.2%, trading near 33,605. It is on track to close below its 200-day moving average, a level it hasn’t touched since May 25, 2023.
As investors navigate the current stock market landscape, the relationship between cyclicals and defensives remains a critical indicator to watch for potential shifts in market sentiment.
While the market has experienced a pullback, it’s important to approach defensive stocks with caution and consider areas like midcap staples for potential opportunities.
The 200-day moving average continues to be a key support level, and its breach could signal a more bearish trend.
With uncertainty lingering, staying informed and monitoring market dynamics will be essential for investors looking to make informed decisions in these volatile times.