As we noted in yesterday’s Sector Snapshot, cyclical sectors are leading the way higher in 2021 as Energy, Materials, and Financials are all up around 5% or more compared to the S&P 500’s gain of a more modest 1.65% YTD.  That outperformance has led to some sharp moves in the relative strength lines of several sectors. As shown below, the Materials sector and Financials have both seen sharp moves higher in their relative strength lines versus the S&P 500.  For Materials, this has been part of a broader trend of outperformance (upward trending line) that has been in place over the past year. For Financials, prior to this most recent upswing, the line first began to trend higher in the late Fall but then took some pause in December. Meanwhile, Consumer Discretionary, Energy, Health Care, and Industrials have also made moves higher, albeit more modest than those of Materials and Financials.

As for the other sectors’ relative strength lines, there have been some sharp moves in the opposite direction.  Starting with what had been market leaders at various points of the past year, Communication Services and Technology are perhaps some of the most notable negative reversals.  For the former, the relative strength line has generally moved sideways over the past year, but since mid-December, the line has been on the decline with one of the most dramatic legs lower taking place in the past week. Tech was a consistent outperformer in the first half of 2020, but since the summer that outperformance has faltered.  The sector’s relative strength line peaked and has been trending sideways since the start of September and the move so far in 2021 has brought the line down towards the low end of the past few months’ range. As for other sectors, Real Estate, Utilities, and Consumer Staples have been trending lower for the better portion of the past year, but with cyclical sectors flying, the relative strength lines of these more defensive sectors have made new lows this week in dramatic fashion.  Click here to view Bespoke’s premium membership options for our best research available.

Several measures of market breadth have been showing strength recently as we noted in yesterday’s Sector Snapshot. Over 80% of S&P 500 stocks trade above their 50-DMAs, more than half are overbought (at least two standard deviations above its 50-DMA), and over 20% of S&P 500 stocks reached new 52-week highs yesterday.  Additionally, shorter-term breadth as measured by the 10-day advance-decline line has also been strong.  Pretty much across the board, every sector’s 10-day A/D line has tipped into overbought levels. That doesn’t apply to only Consumer Staples and Real Estate which have more modest readings, though breadth for these sectors has still been positive recently.  At the moment, Materials, Health Care, and Financials are the most overbought sectors by this measure.  Overall, the sharp moves higher in the 10-day A/D lines does flash a warning sign for the very near term that things are running a bit hot.

As previously mentioned, several sectors are reaching new 52-week highs, and given breadth has been strong to match, cumulative advance-decline lines are confirming the moves higher.  As shown in the charts below, Consumer Discretionary, Health Care, Industrials, Materials, as well as the broader S&P 500 all closed at 52-week highs last week and so too did those sectors’ cumulative A/D lines.  While price did not close at new highs, Tech, Financials, and Communication Services also all saw new highs in their cumulative AD lines.  Click here to view Bespoke’s premium membership options for our best research available.

The average stock in the Russell 3,000 is already up 5.24% year-to-date after just four trading days.  And to think, major indices were down ~1% on the first trading day of the year this past Monday.  Below we highlight the average YTD performance of stocks by sector in the Russell 3,000.  Remember, the Russell 3,000 contains large-caps, mid-caps, and small-caps, and it covers roughly 98.5% of all US-traded market cap.  As shown, Energy stocks have jumped out to the strongest start to the year with an average gain of 13.26%.  Materials rank second with a gain of 9.1%, and then Industrials, Financials, Health Care, and Consumer Discretionary are all bunched together with gains between 5% and 6%.  Technology stocks — last year’s big leaders — are ‘only’ up 4.34% on average so far in 2021, while the Real Estate sector is the only one that has averaged declines.  Click here to view Bespoke’s premium membership options for our best research available.

Looking at Industry Groups, while Technology as a whole is underperforming a bit, the Semiconductor group (which are part of the Tech sector) is up big with average YTD gains of 9.4%.  Autos are also performing very well with a gain of 9.2%.  Thank you Tesla (TSLA).

There are already more than 600 stocks in the Russell 3,000 that are up more than 10% year-to-date.  That represents 20% of the index.

Below is a look at the top-performing stocks so far in 2021.  Usually, it takes weeks or months to see YTD gains like these, but we’ve gotten here in just four trading days.  3D Systems (DDD) ranks first with a gain of 119%, followed by Atomera (ATOM) at 70%, ViewRay (VRAY) at 59.5%, Arcturus (ARCT) at 54%, and Akerna (KERN) at 52%.  We don’t fault you if you have never heard of these names!

Although the S&P 500 has returned to record highs today, the drawdown that had been in place for most of the week did manage to put a dent in sentiment.  In the AAII’s weekly survey, just 42.13% of respondents reported as bullish. That is down from just over 46% last week and is the lowest level in bullish sentiment since the first week of November.  Granted, that is still an elevated reading relative to the past several years. In fact, it is nearly 10 percentage points above the average reading of bullish sentiment of the past five years.

With the decline in bullish sentiment, bearish sentiment picked up.  Bearish sentiment rose 6.7 percentage points up to 33.5%.  That is the highest reading of bearish sentiment since the final week of October. Unlike bullish sentiment though, that is much more in line with the average sentiment reading of the past several years.  Over the past five years, bearish sentiment has averaged 32.5%, roughly one percentage point away from the current reading.

Given the inverse moves of bullish and bearish sentiment, the bull-bear spread has come back down to more moderate levels.  At 8.63, it is at the lowest level since the first week of November. Granted, those reporting as bullish continue to outnumber those reporting as bearish.

Not all of the gains to bearish sentiment came from the bullish camp.  The percentage of investors reporting a neutral outlook on the market fell for a second week in a row dropping to 24.37%. Neutral sentiment has fallen just over 10 percentage points over the past two weeks, the biggest two-week decline since the two week period ending November 12th. Click here to view Bespoke’s premium membership options for our best research available.

As we noted on Tuesday (see here and here), the ISM’s report on the manufacturing sector showed a significant acceleration in price increases in December.  Today’s release of the non-manufacturing report similarly showed prices paid have continued to rise, albeit at a slower pace as the index fell to 64.8 from 66.1 in November.  Granted, the rate of price increases remains at one of the highest levels of the past decade.

One other notable similarity between the two reports was the price changes for commodities. As we noted on Tuesday, prices for freight, steel products, and some PPE materials were all observed as moving higher. That was also the case for the service sector.  Taking a closer look, though, a wider variety of PPE products are in short supply, and as a result, are moving higher in price than was shown in the manufacturing report. More specifically, only gloves were noted as moving higher in price in the manufacturing report, but the services report saw higher prices in not only gloves but also gowns and masks. Additionally, and perhaps one of the most interesting aspects of the report for the Services sector was that just like Tuesday’s release there was not a single commodity reported as falling in price. Click here to view Bespoke’s premium membership options for our best research available.

Tuesday’s release of the ISM’s reading on the manufacturing sector showed a significant acceleration in activity in the month of December.  The service sector counterpart released today similarly showed activity grew at a more rapid pace in December, though, the improvement was not as dramatic as in the manufacturing sector.  The headline index rose to a three-month high of 57.2 from 55.9 in November.  On a combined basis and accounting for each sector’s share in the overall economy, the composite ISM for December rose 1.5 points to 57.6- the highest reading since July.

Although the headline index was higher, breadth in the Non-Manufacturing report was mixed.  Half of the indices for the various categories were lower month over month with two of them, Backlog Orders and Employment, falling into contraction.  Overall, the report showed service sector demand continued to grow in December, but lead times were longer and employment cut back for the first time since August.

The commentary section also painted a more mixed picture than the uptick in the headline number.  A number of comments noted that recently implemented shutdowns and surges in COVID cases have had negative impacts on businesses ranging from weaker demand to labor shortages to supply and logistics issues.

Although many comments noted how COVID has recently impacted demand, December was all around a pretty good month.  New Orders remain well off the highs from the late spring through the fall and are also below levels from prior to COVID, but December’s reading of 58.5 was nonetheless consistent with growth in order volumes.  That marked a seventh consecutive month of growth (above 50) in New Orders and an acceleration versus November.  Meanwhile, businesses have made progress in working off their backlog of orders.  That index fell into contraction for the first time in six months, falling two points to 48.7.  That is the lowest level in the Backlog Orders index since May

Given the further growth in demand, for only the third month in the history of the report—the other months being November and March of 2020—businesses reported inventory levels as being too low (readings below 50). In fact, at 47.7, the Inventory Sentiment index broke below the March reading of 47.8 for a new record low. Although businesses think inventories are too low, actual inventory levels rose at a historically high pace in December.  After a contractionary reading in November, the Inventory index rose 8.9 points to 58.2 in December.  That is the seventh-highest reading on record and the month over month increase stands in the top 1% of all monthly moves. While those two readings may seem counterintuitive, some comments highlighted by ISM give some color into inventories.  A comment from one business noted that the business was “Building inventory when and where possible to mitigate supply chain risks like supplier plant disruptions, carrier-related delays, and the holidays” while another noted that “Inventories were previously too low.” In other words, rather than weakened demand, the build up of inventories was likely in order to get in front of foreseen supply issues down the road and to make up for previously weak inventory levels.

There is evidence of supply issues after all. As previously noted, comments from surveyed businesses made frequent mentions of issues with supply chains and lead times. The index for Supplier Deliveries backs this up.  Higher readings in this index indicate longer lead times, and in December, the index jumped 5.8 points to the highest level since May.  That increase was the sixth-largest MoM jump on record, and in terms of the level of the index, it was the fourth-highest reading on record. Click here to view Bespoke’s premium membership options for our best research available.