Investors are shifting toward defensive stocks. We can see this in both the lagging and leading data.

Recent performance

The top-performing sectors since April 3 have been

  1. Consumer Staples +2.5%
  2. Utilities +2.4%
  3. Healthcare +1.8%

That’s an interesting combination because all 3 of those sectors are considered defensive. Investors tend to rotate to them when they are concerned about the economy (the other defensive sector is real estate).

Defensive stocks are also less sensitive to economic cycles. That’s because they represent goods and services that are considered essential. For example, the Consumer Staples sector includes companies that produce food, beverages, and household items while the Utilities and Healthcare sectors provide the services that their names imply.

Leading indicators also point toward a shift to defensive stocks

If you’ve been reading The Antagonist for a while, you know that sector ratios are strong leading indicators. When we assess the performance of individual sectors relative to the overall S&P 500, we gain a sense of where money is flowing and how investors are feeling.

In addition to their absolute performance over the last 3 months, the ratios for Consumer Staples, Utilities, and Healthcare are all signaling that investors are moving toward defensive stocks.

Consumer Staples relative perfomance

Here is a weekly chart that compares the performance of Consumer Staples (XLP) to the S&P 500 (SPY). To create this chart, you simply divide the sector by the overall index. In this case it’s XLP/SPY. When the ratio is climbing, it means that the individual sector is outperforming the overall S&P 500.

Chart showing XLP/SPY ratio. This shows how investors are shifting toward defensive stocks.
XLP/SPY chart created on TradingView

As you can see by the area above the green arrow, Consumer Staples have been in an uptrend for several weeks. This represents an opportunity for bullish trades.

Utilities and Health Care relative performance

Granted, the ratios for Utilities (XLU) and Healthcare (XLV) aren’t as strong as Consumer Staples. When I consider those sectors’ performance over the last month along with other economic signals, however, the picture becomes clearer.

Here’s the Utilities (XLU/SPY) chart. You can see how the ratio has been slowly climbing since late February. The red horizontal line marks the YTD low point.

Chart showing XLU/SPY ratio. This shows how investors are shifting toward defensive stocks since utilities is considered a defensive sector
XLU/SPY chart created on TradingView

The Healthcare chart (XLV/SPY) is below. The red and green arrows show how the sector has sharply changed directions since the beginning of the year.

If all I had was this chart to go off of, I would be much more hesitant to trust that the upward price momentum would continue. Given the combination of other signals I’m seeing, however, I’m giving this trend more credit than I otherwise would.

Chart showing XLV/SPY ratio.
XLV/SPY chart created on TradingView

Follow the trend toward defensive stocks

In the near-term, I’m looking for buying opportunities within these sectors. I’ll overweight them even more if the trends grow stronger and if new macroeconomic data suggests the economy is slowing even more.

Short-term opportunities outside of defensive stocks

Bearish on small caps

As I mentioned in the most recent Over the Weekend, the regional bank index (KRE) is down 35% YTD. Since most of those stocks are small caps, the overall small-cap index (the Russell 2000 (IWM)), has been hurt as well.

I wrote in the same OTW and elsewhere that nearly all of the market’s gains can be attributed to a handful of mega-cap stocks. That has masked the relative weakness in small caps.

I don’t believe that regional banks are out of trouble either. As long as that sector performs poorly and remains at risk, it will be tough for IWM to make significant gains.

In the short-term, I plan to open bearish trades on small caps when opportunities arise. We recently did this in our Challenge Portfolio, and it netted us a 92% profit in just 7 days.

Bullish on gold

Gold has been on an incredible run since November. Rampant inflation and bank failures have sent the the metal toward the all-time high that it set back in 2020.

When gold crossed the psychological $2,000 resistance level, many analysts expected it to pull back before rebounding to fresh all-time highs. That pullback hasn’t happened, however, and gold’s upward trend remains strong.

Chart showing 5-year price history of gold
5-year price chart of Gold created in TradingView

A few of factors make me believe that we’ll see new all-time highs sometime this year.

First, inflation is very difficult to tame.

Second, during times of crisis—like when banks collapse—gold tends to perform very well. When confidence in the financial system drops, investors often seek the safe haven that gold provides.

Lastly, the U.S. dollar has been declining sharply since November (see chart below).

Chart showing U.S. dollar index over time
U.S. dollar index price chart crated in TradingView

We already hold gold in multiple ways in both our Challenge and Blend portfolios, but I will look to accumulate more under the right circumstances.

Still, as bullish as I am on gold for at least the next year, I don’t expect it to be a straight shot upward. I won’t be surprised at all if the metal pulls back to $1,900/oz or so. If that happens, I’ll likely heavily buy it.

Waiting for the right time to buy corporate bonds

Government bonds grab most of the headlines, but did you know that corporations also issue them?

Debt is becoming a major problem for governments, businesses, and consumers, and rising interest rates are only worsening the situation.

As investors, however, this also presents an opportunity to build a portfolio outside of stocks.

When corporate bond yields rise sharply (as they tend to do during a credit crisis) bond prices will fall significantly. When that happens, you have the chance to make equity-like returns with much less risk.

You can scoop up bonds while they’re selling for far below face value. When yields fall back into their normal range, the price of bonds issued by solid businesses will rise and return to face value (or close to it). You’ll then be able to sell your bonds for a handsome profit. It’s the old adage, “Buy low, sell high” in action.

A simple, step-by-step guide

I realize that this may sound confusing. Most investors have never purchased corporate bonds, and doing so can be risky. You can significantly reduce that risk, however, with ETFs.

Later this week, I’m going to publish a detailed article explaining this process. I’ll also talk about high yield bond spreads, which tell you when to buy. I’m writing it specifically for people who aren’t familiar with bonds. I’ll also keep the technical jargon to a minimum.

Don’t miss that article. Subscribe now for free!

If you’ve never considered bonds, I encourage you to at least learn about them. They can be a steady, safe way to profit and/or protect your portfolio, especially when stocks are underperforming. It’s also important to find ways to generate income outside of the stock market. Doing so gives you true diversification.

Short-term trading strategy

Every day, it seems like the stock market is just one headline away from swinging wildly in either direction. I’ve therefore had to adapt my short-term trading strategy to better suit these dynamics.

For my options trades, I normally prefer expiration dates that are 30-45 days out. Lately, however, I’m been choosing dates that are only 5-15 days away.

I’ve made this adjustment so that I can take quicker profits, even if they’re a bit smaller than I usually aim for. I’m willing to make that tradeoff so that I don’t risk a winning trade becoming a loser overnight.

This adjustment has been paying off very well. Over the last 11 trades in our Challenge Portfolio, we’ve booked 8 winners (73% win rate). The average profit of each trade is 27%, and that’s after including commissions and fees!

I admit that this is a small sample size over a short period of time. Also, it’s highly unlikely that we will be able to maintain a win rate that high. Therefore, I’m absolutely NOT suggesting that we should extrapolate our recent performance onto our forecasted gains. I’m simply sharing these numbers to show that our adjusted strategy is working. When market conditions change, I’ll adapt it again.

Don’t miss those updates. Join readers from 27 countries, and subscribe to The Antagonist for free!

This article is for informational purposes only. It is not financial advice. See the full disclaimer for more details.

Leave a Comment

Do Not Sell or Share My Personal Information