The sharp rally that has started at the beginning of November in the equity markets is still running even if a bit tired after six weeks. Not all the sectors performed the same, this is normal, but the differences in this bullish wave have been particularly strong. In the European markets, for example, according to the Stoxx Sector Indexes, Banks and Basic resources progressed around 20% from the early November lows through the first week of December, Health Care only 5% in the same period, while Food stocks registered a modest loss.
The chart in Figure 1 compares the momentum indicators at 22 weeks for the European sector indexes of Banks, Basic Resources, Health Care and Food. As we can see, the momentum had turned positive already last spring in the Basic Resources, followed by Health Care and Food. In fact, the uncertainties after Brexit had favored the defensive stocks but then they were hit by the late summer weakness and their respective long term momentum indicators turned into negative and stayed so until now.
Figure 1 - Momentum indicators at 22 weeks for the European sector indexes of Banks (green), Basic Resources (brown) , Health Care (red) and Food (blue)
So, this rally is driven by Financials, Materials and Cyclical stocks but these sectors reached extreme levels and they are exposed to the risk of correction at short term. The question is if the lagging defensive stocks will take advantage from a rotation that is reasonable to expect.
Figure 2 and 3 show the Stoxx 600 Food and Beverage and Health Care Indexes since 2014. For both, the bearish wave that had started from the September highs has extended through the lows of the first half 2016. The long term indicator (a 21 weeks low stochastic in the chart) is forming a bottom and the early December bounce could anticipate a relief rally towards the 40 weeks moving average. For both sectors the relative trend against the Stoxx600 is still weak and pointing downwards.
Figure 2 – Stoxx600 Europe Food and Beverage – weekly data since late 2014- Upper window: 21 weeks slow stochastic – Lover window: relative trend vs. Stoxx600
Figure 3 – Stoxx600 Europe Health Care – weekly data since 2014- Upper window: 21 weeks slow stochastic – Lover window: relative trend vs. Stoxx600
In conclusion, the clear signs of rebounding given by the lagging value stocks at the beginning of December are not yet evidencing a switch in the market’s favor toward these sectors. Yet they look undervalued and the long term indicators are forming interesting bottoms around deeply oversold levels. A relief rally could be in the cards, not yet a signal of new strength.
SAMT Vice President - Graubünden and Liechtenstein Chapter– firstname.lastname@example.org
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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