Lever Into Cyclicals
By Bryan Perry, Cash Machine
After a long-overdue correction, buyers took the market by the reins this week with some aid from the European rally and some advances in the Asian markets. As of Wednesday’s close, winners outpaced losers by about a 4:1 ratio, providing some credibility to the day’s gains — and this came despite the downward revision for first-quarter GDP growth (1.8% vs. economists’ estimates of 2.4%).
The real bright spot is the strength in all high-yield sectors on the heels of a nice rally in Treasury bonds. The 10-Year Treasury note yield closed Wednesday down to 2.55%, right in the middle of the day’s trading range. A move back below 2.4% would do much to hoist the high-yield universe a level higher, as it would suggest a top for bond yields has been hit.
Forward-looking data still calls for rotating capital into assets that are more leveraged to the economy, and for now I’m sticking with that school of thought unless the data starts to say otherwise. That may sound a little like the Fed-speak of late, but improving business conditions in parts of Europe, China’s newfound resolve to stem a credit bubble crisis and an upbeat U.S. consumer give rise to the prospect of higher interest rates ahead.