One of the questions I get most often – and one I think about a lot – is this:
What would the market actually have to do for us to get more defensive?
We’ve spent most of this cycle looking for stocks to buy and taking advantage of the upside. That’s the whole point of a bull market.
History is pretty clear: you make a lot more money owning stocks in an uptrend than avoiding them… or worse, shorting them.
So what would force us to shift gears? What has to change for us to pull back and take a more defensive approach?
Simple: The market itself would need to start acting defensively. And if it does, we’ll adjust right along with it.
What Defense Looks Like
In healthy bull markets, you typically see the risk-on groups – Technology, Financials, Industrials, and Consumer Discretionary – leading the charge.
And that’s exactly what we’ve been seeing.
The opposite would be a rotation into defense. When Consumer Staples start catching a bid – and more importantly, outperforming their alternatives – that’s when you know the market is getting more cautious.
To be clear, we’re not seeing any of that. In fact, we’re seeing the opposite.
Below is the performance of Consumer Staples relative to their benchmarks.
In black is small-cap Consumer Staples vs. the small-cap S&P 600 Index. In blue is large-cap Staples vs. the large-cap S&P 500 Index:
Both are trending lower – exactly what you expect during a strong bull market.
And small-cap Staples just closed at new all-time lows relative to the S&P 600.
Internals vs Indexes
If you’re only watching the S&P 500, the Nasdaq, or even a small-cap index, you’re seeing the headline, not the story.
Back when I was younger, I wasted way too much time trying to reverse-engineer the S&P 500: drawing lines, projecting levels, guessing the magic price that would flip the trend.
It never worked. It can’t work.
Everything changed when I finally understood what now seems obvious: This is a market of stocks, and rotation – not index levels – tells you where we are in the cycle.
Thinking this way keeps you sane. It cuts through the drama of daily swings and shows you what’s actually happening beneath the surface.
Because here’s the bottom line: If you trade the averages, you get average returns.
But worse, if you only look at the averages, you’re flying blind.
You have to dig underneath. You have to look at sectors, at individual stocks, at what’s leading and what’s lagging.
That’s where the truth lives. That’s where the warnings show up first.
And right now?
Small-cap Consumer Staples just printed new all-time lows relative to the rest of small caps. Large-cap Staples are still in a relentless downtrend vs the S&P 500.
There is NOTHING defensive about this tape.
This market is still rewarding risk, not hiding from it.
When that changes, we won’t tiptoe around it.
We’ll break it down in real time and reposition before most people even realize what’s happening.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs