The U.S. stock market’s retreat from its 2023 high so far looks like a rather typical pullback, but nervous traders should watch the relationship between cyclical and defensive stocks for signs bears are taking control, according to a closely followed Wall Street macro analyst.
“As of now, we think the 200-DMA will be the floor for the downside but if the market is indeed to go lower and have a bearish trend change, an early indication would be a breakdown in cyclicals vs defensives,” he wrote. The rise in yields now spells trouble ahead for the performance of cyclical stocks relative to defensive stocks, deGraaf said. .
“We’ll be watching very closely for a break in trend, but we wouldn’t be rotating into defensives with the mindset that you are going to make money as the charts mostly look toppy and weak,” he said. The mindset, instead, is “that you will lose less than the broad market.”