Morning Notes — Looking for Cyclical Sector Leadership

Adage: This seems like an appropriate time to dust off the adage that ‘bull markets climb a wall of worry.’ The adage refers to a period of equity market resiliency despite apparent strong headwinds and broad investor skepticism. The adage I just gave you is the most common one you’ll find in an online search, but it’s not the one I was taught, which read ‘a bull market must climb a wall of worry.’ It’s subtle, but adding the word ‘must’ makes bearish investor sentiment a more critical component of a bull market. Individual investor bearish sentiment made three successive record highs this year on March 12, March 26 and May 7. It remains elevated with the 50, 100 and 200-day moving averages at all-time record bearish extremes. Market tops don’t occur when individuals are bearish, they occur when individuals are bullish. And the single most important component in any market are prevailing financial conditions. Monetary policy, fiscal policy and local currency levels determine financial conditions, and collectively at the easiest level in your lifetime.

Sectors: The S&P 500 broke another key resistance level on Monday with the two previous breakouts extending into broad market gains on cyclical sector leadership. Those two previous breakouts occurred just days before the outbreaks peaked in the Northeast and then in Midwest/Mid-Atlantic regional hotspots. Last week, we noted early signs of decelerating COVID-related hospitalization trends in AZ and TX with hope for an eventual regional peak maybe 1-2 weeks out. If history repeats itself, we’d expect to see cyclical/value sector leadership reassert itself over the next several sessions.