Chart of the Week - Investors Hate Defensives
Contrarian Signals: What does it tell us when investors as a group indicate through their portfolio allocations that they hate the typically most defensive parts of the stock market?
Defensive stocks (such as healthcare, consumer staples, utilities), typically outperform during market downturns — either by holding ground in absolute terms, or at least falling much less than the sexier high-beta growth and cyclical sectors. Indeed, plots of relative performance of defensive sectors tend to look much like the VIX (gaining ground during market crashes, falling behind during bull markets).
It's interesting then to note from a sentiment and timing standpoint how implied allocations to defensive sectors just reached the lowest point since 2021. We can basically think of this as a contrarian indicator -- investors hate boring and underperforming defensive stocks during bull runs, and fair enough.
Defensive sectors detract from performance during hot runs of performance e.g. the tech/AI-driven bull run in stocks off the October 2022 lows (where defensive sectors underperformed by about -20%). But defensive sectors prove their worth in adding to performance during market downturns (e.g. defensive sectors outperformed the S&P500 by 30% during the 2022 bear market).
From what I see now, I think the chart below is one of a few key puzzle pieces of a contrarian bull setup for defensive stocks as a relative value play, but meanwhile arguably represents a contrarian bear signal for the stock market as a whole.
Indeed, troughs in the indicator in this week’s chart (showing implied portfolio allocations to defensive stocks) often line up with short-term market peaks, while a surge in interest in defensive stocks is often indicative of a market bottom.
So to answer the question, when investors as a group hate defensive stocks… contrarians would do well to get defensive!
Key point: Light allocations to defensive sectors is a contrarian defensive signal.
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