Understanding Market Themes

One of the findings that stand out in dramatic relief in my research is the relative strength of the Materials, Industrials, and Energy stocks relative to Consumer Discretionary, Consumer Staples, Financial, and Technology stocks. Above we see the relationship between the Materials sector ETF and the Technology sector ETF within the S&P 500 Index. This, I believe, represents an important thematic dimension for markets: the degree to which capital is rewarding physical vs. intellectual assets. In the late 1990s, we saw a premium according to the intellectual assets of technology. Since 2004, however, we've seen an upward trend in the relationship between hard assets and technology.

One of the promising areas of money flow research is its ability to detect these themes among sectors. The usual question traders ask is whether the market is likely to rise or fall. An equally fruitful question, however, is: Which themes are likely to benefit from capital inflows? When the dollar (and returns from dollar denominated assets) are relatively weak, hard assets become attractive storehouses of value.