Inside Markets — Seasonal Factors

The recent pro-cyclical rotation accelerated yesterday with the cyclical/defensive ratio pushing to the high end of its 12-month range. Over the last 20 days, the performance of the SPX Cyclicals Index vs. the equal weight S&P performance has also been a 3z move. Importantly, this could just be part of a seasonal January Effect, which has been pulled forward into November/December over the last ~20 years. A new high in the cyclical/defensive ratio or breakout in the Copper/Gold futures ratio (neither has happened yet) would legitimize the move. A real cyclical rotation could be painful for investors crowded in secular growth stocks. For now, we err on the side of seasonality and note the momentum factor has reached short-term oversold levels. Historically, the momentum factor rarely (if ever) breaks lower from oversold levels when the SPX is at/near highs. Santa Claus rallies tend to be everything rallies.