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Bye Bye Cyclicals! Defensives Are the New Market Leaders

Bye Bye Cyclicals! Defensives Are the New Market Leaders

A funny thing happened on our way to record highs this week -- the market ushered in new leadership. While names like Tesla (TSLA), Netflix (NFLX), and Facebook (FB) are still way out ahead on the leaderboard this year, the monthly winners are suddenly all defensives.

"It may be troubling, but it's indicative of what's happening in the market," says Vadim Zlotnikov, chief market strategist at AllianceBernstein in the attached video. "People want yield. They want income. They want certainty."

Related: Market Highs Are Masking Opportunity in Dividends: Cohen

Whether or not you agree with the thinking behind this shift towards defensive and income producing sectors is really not as important as it is to simply acknowledge the fact that it's happening, or as Zlotnikov characterizes it, "Is it the wisdom of the crowd or the insanity of the crowd?"

"The answer is timing. In the long term, it's always going to be insanity," he says, "but in the short-term, it is actually wisdom." Which means fighting this trend will likely be costly and unproductive.

"You're starting to see a pick-up and crowding into these income generating trades," he says. Partly because we're "not seeing huge growth yet," and partly because people want income while they wait for the growth to materialize.   As of the close Wednesday, Telecoms (IYZ) and Consumer Staples (XLP) were the top two performing sectors in the S&P 500 for the month, with gains of 5.9% and 5.3% respectively, versus a 3.8% month to date gain for the S&P 500.    This as the Discretionary (XLY), Energy (XLE) and Tech (XLK) sectors are all lagging the index.

Again, you can doubt this trend, or even disagree with it intellectually, but Zlotnikov says there's a better way to play it.

"You're going to need to have exposure to some of these income trades that are stable and make you feel comfortable," he says, "but you're also going to need to be contrarian and actually buy some of the deep value cyclicals."

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