The trend for inflation-sensitive stocks may be weakening.

Monday – Sector Strength

What is this spreadsheet telling us?

Last week, small caps were in the lead, but now the large caps are leading in relative strength. It could be an indication that the medium-term trend that started Nov08 is beginning to weaken.

Also, notice that all the major indexes are skewed far right. That is generally a sign of a very strong trend, but it is also an indication that, based risk-reward, this is not the best time to be making purchases.

The top sectors are financials, technology and industrials. The stocks in these groups benefit from economic growth with higher rates, as well as the safety of strong balance sheets.

The top industries are regional banks, semiconductors, brokers, home construction. These groups also benefit from higher rates, but there is a lot more risk in these stocks. Their strength therefore points to economic growth.

The top foreign ETFs are all emerging markets, and these stocks represent growth and inflation… and risk. But what to make of GDX in the very lowest slot? I think it means be very careful with your high risk and inflation-sensitive stocks.

Bottom line: This spreadsheet shows a strong trend, and indicates growth, inflation and higher rates. But caution is called for from a risk-reward basis. And the trend for inflation-sensitive stocks may be weakening.

The energy and basic materials groups have been leaders for about a year now. Industrial metals, precious metals, steel, energy, emerging markets all surged in the last 12 months after being left for dead.

But now these groups are showing the signs of selling. This is not a bad looking chart, but keep your eye on it because it has implications for the entire growth-and-inflation-sensitive group.

The gold miners are below the 40-week, and right above the 80-week average. I generally think of the 80-week as the final line in the sand. When prices break below the 80-week, it is no longer a warning and I am out. Good things rarely happen to stocks that can’t hold above this level.