U.S. Intermarket Signals Turn More Constructive, Though Consumers Remain Defensive
The analysis of several intermarket ratios allows us to take a snapshot of confidence within the U.S. private sector. The picture that emerges is one still characterized by caution, but with encouraging signals coming from small caps and industrial metals.
The first ratio we consider is that between consumer staples and consumer discretionary stocks. As shown in the chart above, the trend has moved sideways over the past two months. The 50-day moving average, which filters out some of the noise, indicates an upward trend in the ratio that has remained uninterrupted since last April. The shorter-term moving average, however, shows two lower highs, which could suggest an attempt at a trend reversal.
For this ratio, it is also useful to analyze the trend in the correlation between the two sectors, and here we must highlight an interesting divergence. The correlation between defensive consumption and discretionary consumption is declining.
In other words, the market is pricing in a consumer who is less willing to spend, showing a greater preference for safety and necessities rather than growth-oriented and discretionary purchases.
Even more interesting, in continuing our intermarket analysis of U.S. private-sector confidence, is the performance of the ratio between the Russell 2000 Index and the S&P 500. The Russell 2000 represents small and mid-sized U.S. companies whose economic fortunes are closely tied to domestic demand, inflation, and interest rates.
As can be seen quite clearly, the ratio is in an uptrend, trading above its long-term moving average and at its highest level in a year. The recent short-term surge is also noteworthy—something we are observing in our Health Scores as well—and appears to indicate a renewed favorable environment for U.S. small-cap stocks.
This is a sign of confidence in the resilience of demand and in the growth prospects of the U.S. economy.
Further evidence that something may be starting to change in private-sector sentiment comes from another well-known intermarket ratio: Copper/Gold. As shown above, the ratio broke above its long-term moving average toward the end of April, benefiting from demand from the technology sector and weakness in gold.
The trend is clearly bullish, with confirmation coming from the bullish crossover of the 50-day and 200-day moving averages.
Overall, the analysis presents a picture rich in mixed signals, typical of a transitional phase. Investors believe the economy can improve, but they do not yet see a consumer that has fully regained momentum.
