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I suppose that I should be happy. I correctly turned bullish on a tactical basis (see Give in to the Dark Side). I correctly called the Cyprus mini-crisis (see Don't get too excited about Cyprus and More of the usual Eurocrisis drama). As I write these words, the news of the Cyprus deal is sparking a modest risk-on rally.

Over here on this side of the Atlantic, the American economy continues to chug along, despite the sequester and payroll tax hike. I agree with Tim Duy when he writes that the recovery is real.

Sector performance signals caution
When I reviewed my charts on the weekend, I came away vaguely dissatisfied. The relative performance of industries and sectors reveals a market whose leadership is increasingly turning away from cyclical groups and toward defensive sectors and a "negative beta" group.

If we are seeing such a bullish outlook (Europe, US economy), why are cyclically sensitive sectors not doing better? Consider the relative performance of Consumer Discretionary stocks against the market. This sector is currently seeing a sideways consolidation after stalling out of a relative uptrend that began last August.

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Industrials are also displaying a similar pattern as Consumer Discretionary stocks: Stalling out of a relative uptrend followed by sideways consolidation:

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The same could be said of homebuilding stocks:

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The only cyclically sensitive group that I could find that is still in a relative uptrend against the market are the transportation stocks, which is a relatively narrow group:

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Defensive sectors taking the lead
On the other hand, defensive sectors are starting to take the leadership position. Why are they outperforming when the stock market is advancing?

Consider, as an example, the relative performance of Consumer Staples, which is staging a relative strength rally:

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Health Care, another sector thought to be defensive in nature, is already in a shallow, but well-defined relative uptrend after staging an upside breakout through relative resistance:

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Utilities are forming a relative saucer bottom against the market:

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Gold: The negative beta play
What's more, gold stocks are showing signs of revival. The Amex Gold Bugs Index has rallied through a relative downtrend line against the market, though the longer term relative downtrend (dotted line) remains intact:

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HUI has already staged a relative turnaround against bullion as it has strengthened through the relative downtrend against gold.

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Gold and gold stocks have somewhat defensive characteristics as they have had a zero or negative correlation against the SPX in recent weeks. Their revival could be a warning sign for stock bulls.

Be very, very careful out there
As I wrote in my recent post Give in to the Dark Side, my inner investor was already skeptical about this most recent rally:

My inner investor continues to be concerned about this market advance. He believes that the prudent course of action would be to move his portfolio asset allocation to its policy weight, i.e. if the policy weight is 60% stocks and 40% bonds, then the portfolio should be at 60/40.

At the time, my inner trader wanted to throw caution to the winds and get long the market. Now, my inner investor is telling him, "I told you so." Under these circumstances, my inner trader is getting very, very nervous and he is tightening up his trailing stops. The behavior of these sectors is flashing warning signals that if even if this market were to rally further, the advance could be very choppy.

Until we see some evidence of upside relative breakouts of consolidation ranges in cyclical sectors and industries, these market internals should make anyone who is bullish an uncomfortable bull.

Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Source: An Uncomfortable Bull