3/4/2025 - One thing I've learned from working with portfolio management teams for many years is that they think thematically. They don't just look at individual charts and decide upon entries and exits. Rather, they scour a variety of markets and see how they are moving relative to one another. In the patterns of strength and weakness, themes emerge that are very relevant to economic growth, stability, and weakness. The first way of identifying themes is in the relative movement of various stock market sectors. For example, take a look at the consumer discretionary sector, XLY. It topped out in mid-December, well ahead of the overall SPX index. Note how the raw materials sector, XLB, topped out even earlier and is well off its October peak. Energy shares (XLE) are off their late 2024 highs, as are the industrial stocks (XLI). Just during the first part of the year, we've seen the defensive consumer staples sector (XLP) outperform the formerly hot technology sector (XLK). All of this suggests a reduced emphasis on economic growth. Notice how there is a pattern to all this: First we see reduced participation when the broad index makes marginal new highs and then we see *changed* participation as bear market activity commences. The relative action of the stock market sectors tells us whether the themes dominating investors are related to growth or defensiveness; whether we're seeing broader participation or reduced participation. Charts can be very helpful in identifying points to enter and exit when you get to the point of executing your trades. But it's themes that provide the most reliable information re: *what* and *how* you should be trading.
Further Reading:
Understanding Market Themes From Sector Breadth
.
Posts
