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Cyclicals and defensives: who leads when fear is total — and when sentiment screams

Article

The extreme

Who leads a stock market says more about the regime than how much it rises or falls. Two months prove it by reading the same ruler in opposite directions. In February 2020, with domestic mood at its floor, capital locked itself into defensives: Utilities and commodities in reais gained ground against the index, while the banks stayed punished. Four years earlier, in March 2016, the picture was mirrored — money abandoned the safe havens and rushed into the sector that had been beaten down the most.

In numbers: in Feb 2020, the Utilities/IBOV ratio went from z 1.48 to 2.23 and Commodities (R$)/IBOV jumped from 0.11 to 1.57, with Ânima plunging from 33.2 to 4.1. In Mar 2016, Financials/IBOV leapt from −1.65 to 0.18 — nearly two deviations in a single month — and Utilities pulled back from 2.27 to 1.28, losing its safe-haven post.

What happened next

Each leadership told a different story about what sustained it. In February 2020, the preference for the defensive was consistent with the panic all around: mood and flow fell together to the floor — the Perene Risk Index zeroed out at 0.0 — and the shelter in indexed revenue and hard currency, with the dollar at R$ 4.341, only confirmed the flight. In March 2016, by contrast, the cyclicals led ahead of the economy. Domestic sentiment shot up to 95.5, extreme optimism, but the risk structure pulled back only to 54.0 and the Brazilian regime remained defensive, at 37.9. The Cyclical/Non-Cyclical ratio crossed the waterline (−0.78 to 0.51); the intermarket rose to 43.29 — a third month of improvement, but still moderate risk-off.

What did not happen

In neither month did the aggregate index deliver the rotation. In Feb 2020 the intermarket barely moved — from 38.2 to 39.82 —; in Mar 2016 it merely improved, without crossing into neutral terrain. Whoever read only the summary number missed the move, which lived in the hierarchy of sectors, not in the total. And the 2016 euphoria validated nothing: with debt at 66.3% of GDP and the regime still defensive, the mood at 95.5 was the crowd's opinion, not the economy's certificate.

The honest verdict

Sector leadership is a thermometer of regime, not a stopwatch. The defensives in front in 2020 confirmed the fear, but did not say how long it would last. The cyclicals in front in 2016 arrived ahead of the fundamentals — and the month itself called for caution. Leadership changes hands at the turns; it just doesn't warn you when it changed too early.

Continue reading: The bottom of 2016 — structure before mood · Structure leads sentiment · The dollar as a thermometer of regime →

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Characters: Structure (intermarket) · Flow (risk appetite) · Dollar · Cyclicals × defensives