A Look at a Slice of the Stock Market
- cornerstoneams
- 1 hour ago
- 4 min read
In today’s edition we are taking a peek into collective market participants’ behavior within the stock market.
We like to look at select areas within many markets to see how they are trading relative to one another. We think of these as relationship charts. The more technical term labels them as relative strength charts. That is, how is X performing relative to Y.
Our view, through the relationship view, is that they are not only useful as messengers in aiding in the deployment of capital, but they are also useful in gauging collective participants’ view of the general economic landscape.
Importantly, because participants are always forward-looking, these types of relationship views can be thought of as how said participants are viewing the downstream economic landscape.
It is also important to note; these types of collective participant views only offer the spirit of their downstream expectations rather than any sort of economic tone. More specifically, what we mean by tone is these types of views do not offer what level of strength GDP, for example, will be displaying in the near future.
Will GDP come in at 3.2% or 2.6%, as an example. These relationship views do not walk us to such specificity.
Rather, they are more useful through the big-picture lens of whether participants expect continued economic growth, or if they are beginning to signal, via the wake they leave behind from their collective trading operations, that a weakening economic backdrop is expected.
Note the entire underlying storyline for these types of views is they include no opinions, no talking heads, or pundits offering what he/she believes is coming down the pike.
Instead, this is messaging from the collective deployment of real capital positioned within any market that is under observation.
Through this lens, we ourselves, at times, find this quite interesting in the sense that market messaging can seem quite crazy relative to general expectations, or even our own specific thoughts.
Fighting markets is not wise, which is why we consistently run a wealth of relationship views to delve into the collective participants’ expectations regardless of what our specific thoughts are, or, more broadly, what general expectations are suggesting.
A Slice of the Stock Market
The view below is a sector perspective for the stock market, which we last shared in late winter of this year. With this it seems appropriate to offer it again in order to check back in, seeing as we are several months down the timeline.
The above chart dates back to the late 1990s in order to offer some historical perspective.
The relationship view shared above focuses on two sectors within the stock market.
They are the consumer discretionary sector along with the consumer staples sector.
When economic times are expected to be positive (note the generality of the described expected economic landscape), it is customary for consumer discretionary stocks to be bid up as compared to the consumer staples sector.
Staples are viewed as more of a safe haven than that of consumer discretionary areas, and through this are bid up relative to that of consumer discretionary companies when a weakening economic landscape is expected.
The above chart takes the equally weighted sectors and pits them against one another, if you will, to show which is performing relative to the other.
Keeping it very simple, when the general trend is moving up, it means consumer discretionary companies are being bid up by collective participants over that of the more conservative consumer staple companies.
Our concern develops when we see signs that the line is developing into a downtrend.
Our red arrows denote periods of time when the relationship turned hard south, which again reflects participants’ preference for the more conservative consumer staple-type companies over the more economically sensitive consumer discretionary companies.
As an extension of this specific sector relationship behavior, by and large, those periods also experienced broad stock market weakness and recessed economic health.
Collective stock market participants dislike weakening economic landscapes, especially when they turn over to the point of recessing.
Recessions, or even notably slowing economic growth, bring along with them a macro landscape of lower sales and profits. Ultimately, profits are the lifeblood of companies and their share prices.
To the far upper right of our chart, we note our black rectangle, which was the last period of time that we shared the above chart. At that time, it drew our attention in light of the beginning of a downtrend as highlighted within the rectangle.
Back then we shared we would continue to monitor and update accordingly if signs warranted further discussion.
As we can see, the line began to move upward again, which was signaling market participants were reestablishing their preference to bid up the more economically sensitive area of consumer discretionary companies to that of the more conservative consumer staples sector.
Relative to our use as an economic barometer, said participants’ actions were proven correct, as no recession has surfaced since that time.
To the current day, we can see the above remains elevated with a very slight chink in its trend. At this juncture, that slight pause is offering little concern.
What we are looking for is a developing story whereby collective participants are clearly struggling to favor the economically sensitive consumer discretionary companies, as they had done in previous examples, as highlighted with our red arrows.
Importantly, the above relationship can change quickly. This is why we shared it in early 2025, in light of the rapid change in behavior it displayed back then, as depicted within our black rectangle.
At the same time, as recent history has shown since our last sharing, a quick downturn does not assure immediate issues. Rather, it offers a note of caution for further and closer observation as days, and near-term weeks unfold. This holds true for the plethora of relationship charts we monitor and observe.
As we stand currently, collective participants within the stock market, via the above relationship chart, are not offering imminent economic issues.
As shared though, the above as well as other relationship behaviors can change rapidly, so we continue our watch.
We will be sharing more of these types of views to aid in offering some level of general economic clarity, as viewed through the lens of collective market participant messaging, via their market operations, in coming editions as we round out the remaining few months for 2025.
I wish you well….
Ken Reinhart
Director, Market Research & Portfolio Analysis
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