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Market Sector Analysis - Week Ending July 29, 2016 - Retail Is Outperforming Despite The Q2 GDP Flop.

|Includes: Technology Select Sector SPDR ETF (XLK), XRT

Overview:

Last week's negative performance of both Utilities and Consumer Staples supports the premise the market is taking on a more aggressive posture. Only two of the economically-sensitive sectors - Technology and Cyclicals - finished positive for the week. However, Technology's outperformance demonstrates there is a rotation into more risk-on positions. See next chart…

The next chart is a monthly rollup for July through Friday's close (July 29th). It shows that money is clearly rotating into the more aggressive sectors since the start of the new quarter (Q3). Energy is beginning to underperform, but this is more likely due to temporary over-supply issues related to crude oil, versus actual demand issues or economically related weakness.

The next chart is a relative rollup for July. I have included the relative chart to demonstrate how significant the rotation is out of Utilities and Consumer Staples. Those two defensive sectors underperformed the S&P 500 by a wide margin. It will be interesting (and important) to watch how this plays out going into August which historically is a weak month on a seasonal basis.

Insights:

Considering Friday's poor GDP report for Q2 (2.6% forecasted, 1.2% actual) it was surprising to see the market not react in a negative manner. Was this a case of bad news is good news (no rate increase this year), or does the "smart money" sense something else?

Over the weekend Barron's reported that despite the poor Q2 GDP report consumer spending has expanded at a 4.2% annual rate (see Up and Down Wall Street - Forsythe, July 30th). The following chart shows the performance for the XRT (SPDR Retail ETF), the XLY (SPDR Cyclicals ETF) and the S&P 500 for July 2016. The S&P 500 was up ~3.5% for the month while the XRT was up ~7.5%, more than double the S&P. Cyclicals was boosted by the retail sector and finished July with a 4.58% gain.

Is this outperformance trying to telegraph that the consumer is back? Granted that much of the recent retail strength has come from automobile sales (as also reported by Barron's), but perhaps consumer spending is expanding and getting back on track.

The following chart is for July's top ten best performing industry groups within the Consumer Discretionary sector (Cyclicals). As the chart shows July was not just about automobiles…

The next chart shows the relative performance of the XRT versus the S&P 500 for the last year. The long-term downtrend is obviously still in place (red dashed line on chart). However, on relative strength basis, XRT has broken through its previous established support - resistance line. A bottom could be in place with a new uptrend forming.

Summary:

The strength that began in Technology at the beginning of July continued last week. That makes four straight weeks of gains for the Tech Sector. Tech's strength is also helping to boost the NASDAQ, which finished in the top slot for July for the major indexes (see next chart).

The Russell 2000 finished strong as well for July. Strength in small caps also supports the aggressive, risk-on posture of the current market. The Technology sector is composed of many small-caps as is the Biotech industry group which continued its uptrend as discussed in last week's Instablog. I will revisit Biotech and Commodities (discussed in the July 15th blog post) in my mid-week update.

Previous Instablog's for Review:

Timing The Market With Sector Analysis - Week Ending July 22, 2016 - NASDAQ Getting A Boost From Tech And Biotech.

Timing The Market With Sector Analysis - Week Ending July 15, 2016 - Rising Yields & Commodities Are Net Positive.