Defensive
Stock Sectors Outperform as Big Tech Declines and U.S. Economy Weakens
By the Curmudgeon with Victor
Sperandeo
Executive
Summary:
Despite
lots of recent ups and downs, the U.S. stock market seems to be flat overall,
but beneath the surface, massive rotations are taking place. Large-cap value stocks are up sharply while
large cap growth has stalled or declined, even as the S&P 500 barely moves.
In particular, Amazon (AMZN) closed down for its 9th straight day on Friday February
2026, posting its longest losing streak since July 2006. AMZN has just erased $470 billion in market cap over the last 9 days and
is down AMZN -16.7% from its February 3rd peak of $238.62. This could be the canary in the coal mine for
large cap tech stocks and other highflyers.
Warning
from Consumer Staples:
The
improvement in three defensive sectors Consumer Staples, Utilities, and Real
Estate indicates a rotation to defensive positioning in a risk-off move by
investors.
The
offense vs. defense chart below evaluates the relative performance of the
Consumer Discretionary (XLY) vs. Consumer Staples (XLP) sectors. Both of these ratios have been trending lower since the
beginning of 2026, and both ratios reached another new three-month low this
week.
The
current outperformance of Consumer Staples over Consumer Discretionary
stocks suggests that market participants are rotating away from cyclical
exposure (such as automotive and luxury goods) in favor of defensive havens
like household essentials and groceries.
Historically,
this rotation has served as a precursor to significant volatility. There were
two similar outperformances during these recent time periods:
1. November 2021 October 2022:
The
Nasdaq peaked (Nov 2021) and the S&P 500 topped (Jan 2022) followed by
large declines. The subsequent Nasdaq 100 drawdown reached 38% and the S&P
fell 25% from that top till the lows in October 2022.
2. February 2025 April 2025:
This second instance was marked by significant volatility following major trade
policy shifts. During this phase, the S&P 500 experienced a sharp 21%
correction through early April 2025, while the Nasdaq 100 saw a peak-to-trough
decline of nearly 23%.
..................................................................................................
The
Kobeissi Letter - Something Incredible:
At
least 115 S&P 500 stocks have dropped -7% or more in a single day over the
last 8 trading sessions. Yet the S&P 500 is down
just -2% from its all-time high! In the past, when at least 115 stocks saw a
decline of -7% or more in an 8-day trading period, the average index drawdown
was -34%.
The
last time this many stocks were hit while the index
was still near all-time highs was during the 2000 Dot-Com Bubble. In 2008, this
threshold was triggered when the index was already in a bear market.
.
Prechters Pluto Chart of
Stock Market Valuation:
Robert
Prechter, who writes the Elliott Wave Theorist, has been pounding the
table for years about ultra-high stock valuations (as has the Curmudgeon). Heres his latest Pluto
chart showing how far out is pace are the current market valuations:
Way
Too Many Bulls:
Coupled
with ultra-high valuations is super bullish investment sentiment. The latest Investors Intelligence data
reflects significant optimism among professional newsletter advisors:
l Bulls:
62.3%. This is the first time bullishness has crossed the 60% threshold since
late 2024.
l Bears:
21.7%.
l Bull/Bear
Ratio: 4.13, up from 3.99 the previous week.
l Bull-Bear
Spread: Approximately 40.6% (in 90th percentile)
.
..
Victors
Comments:
The
market is accelerating a rotation from high-beta growth stocks into value,
defensive, and fixed-income sectors due to investor's realization of a
deepening economic slowdown, rather than the heavily adjusted headline data
reported.
Employment Disconnect: The BLS
reported non-farm payrolls showed a "seasonally adjusted" gain of
+130,000 in January, but that number has no basis in reality. Continued,
high-profile corporate layoffs contrast sharply with manufactured positive net
hiring data. Unadjusted data indicates a
massive, structural decline in jobsa trend
consistently overlooked by BLS reporting.
Also, the report included major revisions that reduced the
number of jobs created last year to just 181,000, a third the previously
reported 584,000 and the weakest since the pandemic year of 2020.
Credit/Real
Estate Contagion: The accelerating foreclosure crisis40,000
homes seized in one monthsignals a severe consumer contraction, largely driven
by surging property taxes. This banking-sector stress is actively reducing the
money supply, evidenced by the contraction in risk assets like Bitcoin, yet
this economic pain is not reflected in official CPI or employment statistics.
The
Inflation Mirage: The official headline CPI of +2.4% YoY
(Core at 2.5%) lacks credibility compared to real-time, alternative data. The
Truflation index (tracking 13+ million prices) shows, YoY, inflation
trending severely downward, ranging from 0.68% to 0.90% over recent days. This
massive divergence suggests official data is failing to capture the
disinflationary reality in the U.S.
Bond
Market Impact: The glaring discrepancy between official
data and economic reality has caused Treasury and corporate bond yields to
decline.
Monetary
Transition: We anticipate a significant Fed policy
reversal as the market positions for the end of the current Chairman's term on
May 15th. Market participants are aggressively buying long-duration
securities ahead of a projected drop in the Fed Funds rate to 2.00%-2.25% by
the October 2026 FOMC meeting. See the Market
Positioning section below for what I recommend.
Balance
Sheet Action: To manage this Fed Funds pivot, we expect
the Fed, under new Chairman Kevin Warsh, to reduce its balance sheet from $6.6
trillion to $6.0 trillion to counter the effects of rate cuts and keep
inflation in check.
U. S.
Mid-term Elections:
The
Democrats will win the mid-terms due to President Trumps suicidal policy of
protecting pedophiles and condoning a cover-up of the Epstein investigation.
This embarrassing spectacle can be judged by everyone.
A February 6-to-9th Economist/YouGov poll
found that 50% of Americans think Donald Trump was involved in the crimes
Epstein is accused of and 52% of Americans believe Trump is actively trying to
hide the truth about Epstein's crimes.
Moreover,
Attorney General Pam Bondis February 11th Congressional testimony
will go down in history as the most bizarre and absurd political clown show of
all time.
This
fiasco guarantees the end of Trumps power. It is another reason investors are
moving to safer, lower risk, investments, as the U.S. and most western
governments are in chaos. The only conclusion is the elite pedophiles own the
politicians, and the rule of law is now officially a thing of the past.
Victors
Conclusions & Market Positioning:
Defensive,
high-yield stocks are outperforming as investors seek safety. A prime example
is the rapid 25%+ appreciation in AT&T (T) since late January, a move
indicative of a capital flight into defensive, low-risk income generators.
The
underlying economic data is weak and deteriorating. The market is discounting
the anticipated policy, fiscal, and political transition, driving capital into
assets that benefit from lower rates. As
a result, I own the 5-year Treasury Note futures in size as I believe
the economy is very weak and will get weaker.
Given
the intense political volatility, systemic instability, and the breakdown of
traditional, transparent, legal, and economic indicators, Gold remains
the premier hedge against systemic chaos and geopolitical uncertainty.
Bottom
line: The market has concluded that current economic narratives
are unsustainable. Investors are swiftly rotating toward safety, yield, and
hedges against an accelerating economic and political paradigm shift.
.................................................................................................................................
End
Quote:
Commenting
on Andrew Ross Sorkins excellent book 1929,
Robert Prechter wrote:
The
debt, leverage, Fed meddling and public participation in today's markets and
economy are one level higher on the Richter scale than they were in 1929. The outcome will be commensurate."
.
Wishing you good
health, success, and good luck. Till next time.
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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