Gavekal Capital: Three Divergences To Keep An Eye On

Monday, September 8, 2014

Three Divergences To Keep An Eye On

We spend some of our analytical time exploring the relationship between various assets in an effort to understand the context of the market. Earlier in the year several divergences appeared that we took note of: 1) the trend of utility stocks vs. the S&P 500, 2) the trend of high yield bonds and 3) the trend of small cap stocks vs. the S&P 500. For a few months between April and August some of the divergences appeared to be closing, but recently they are diverging again.

In the charts below, we show highlight these divergences, which all suggest some caution toward the equity markets in the near term. In the first chart we show the relative performance of Utility stocks vs. the S&P 500. When utilities (bond substitutes) outperform, it is a risk-off signal.

Next is a comparison between the relative performance of small-cap stocks vs. the S&P 500. When small-caps underperform, this is a risk-off signal.

Last is a comparison between high yield spreads and the S&P 500. When high yield spreads are widening, this is risk-off signal as well.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
We offer the Gavekal Knowledge Leaders Strategy in multiple products for global investors. For more information about our product offerings please visit http://www.gavekalcapital.com.
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