The chart below highlights the relative strength of the 24 major groups relative to the S&P 500 over the last year. For each chart, a rising line indicates that the group is outperforming the S&P 500, while a falling line indicates underperformance. In each chart, the black dots represent the days where that group’s relative strength peaked or troughed relative to the S&P 500. Finally, the red shading in each chart represents the period since September 1st when the most recent leg of the rally began.
Since the rally began in September, the five groups which have seen the biggest improvement in their relative strength are Autos, Tech Hardware, Consumer Durables, Software, and Retail. These are all groups which tend to outperform when investors are expecting the economy to improve.
On the downside, groups that have seen the biggest decline in their relative strength include Utilities, Household and Personal Products, Diversified Financials, Foods, Banks, and Telecom Services. With the exception of Banks and Diversified Financials, these are all defensive oriented groups that investors seek out when they expect economic weakness.
Based on the performance of the major S&P 500 groups as well as today’s release of the Beige Book, which saw modest economic growth, it’s hard to see why the Federal Reserve seems so hell bent on quantitative easing (QE). However, this also wouldn’t be the first time that investors have questioned the actions of the Fed. That being said, while any signs of economic growth should be welcomed by long-term investors, they could have a short-term negative impact on equities. If investors have really bid up stocks on the prospects for further QE, any indications that make QE seem less likely will cause drive-by traders to sell.
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