MorningWord 8/28/13: This morning in his MacroWrap, Enis highlighted the faltering leadership from the Financial sector, but specifically he noted, “The break of this uptrend of out-performance is concerning as the market searches for new leaders to take it higher”. One by one this year those sectors deemed to be beneficiaries of an economic recovery have given up the leadership crown, starting with Homebuilders topping out in Q1, and finally making its way down the consumer food-chain, evidenced by the break of the XRT (Retailers), down almost 7.25% since making a new all time high with the SPX back on Aug 2nd.
Rotation is healthy, as narrow rallies can not last, and are usually the sign of a topping process as we saw in the late 90s with a handful of tech names driving much of the gains. Back then they called the leadership the “4 Horseman”, CSCO, MSFT, INTC & LU, and there have been other variations as many referred to AAPL, AMZN, GOOG & RIMM as another play on this theme into the 2008 market top. What I find interesting as we come off of all time highs, as we did in the other periods mentioned above, the horses have little to do with technology (which has sorely lagged most of the year) but more to do with stodgy household names like AMGN, BA, HD & JNJ . At the highs of year, AMGN had nearly a 35% gain, BA nearly a 50% gain, HD nearly a 32% gain and JNJ nearly 35%. All of this vs the backdrop of the SPX that at its highs on Aug 2nd was up about 21%, while not parabolic, the normally sleepy issues were showing fairly stretched valuations on a historical basis.
Which brings me to the breadth of the rally so far. Looking at the top 20 names in the SPX, they make up whopping 30% of the weight of the entire index, yet on average those stocks are up only about 12%,which displays wider participation than in past market tops where the largest gains came from a small handful of heavy weighted stocks. So the main take-away is if the biggest stocks in the market are not participating (not displaying leadership), and we do go into a risk-off environment, we could see a fairly dramatic move out of mid and smaller cap names (the Russell 2000 is up 19% ytd vs the SPX up 14%). This could speed the overall decline, which has been fairly orderly so far this month, and take a big chunk out of some of this year’s biggest winners.