Is the stock market overly exuberant? 

With broad-based indexes like the S&P 500 and Dow Industrials trading near all-time highs, it’s a loaded question. Examining several different barometers can provide us with some insight into where stocks are at and where they might be heading.

The price uptick in exchange-traded funds geared toward industry sectors with a defensive bent is a newer development that’s worth mentioning.  

During the first two months of 2021, the Consumer Staples Select Sector SPDR (XLP), Real Estate Select Sector SPDR (XLRE) and Utilities Select Sector (XLU) each lagged their fellow S&P 500 sector peers. And at one point in early March, all three sectors had posted negative year-to-date returns. But a major trend change is underway.

XLP, XLRE and XLU have each turned higher and now have positive year-to-date returns.

 XLRE leads the pack with a gain of 17.4% while XLU has gained 6.4% and XLP is up 3.6%. The advance of defensive sectors has broadened the overall stock market’s rally. And if you’re a bull, broader participation by all (or most) industry groups versus fewer is what you want to see from a breadth perspective.

What’s behind the rebound in defensive sectors?

The deceleration in rising interest rates has helped utilities and real estate. Both sectors are highly sensitive to fluctuating rates and the yield on 10-year U.S. Treasurys has stalled between 1.50% to 1.65% since early March. 

Besides rebounding prices, both utilities and real estate have become popular alternatives to lower-yielding bonds. The Vanguard Total Bond Market ETF (BND) has a yield of just 1.3%. Meanwhile, the index yield for XLU (utilities) is 2.9% while XLRE (real estate) is 3.2%.

Another trend is the performance advantage of mid- and small-cap stocks over large caps.

The iShares Core S&P Small-Cap ETF (IJR) has jumped 22.3% and the SPDR S&P MidCap 400 ETF Trust (MDY) has risen 20.1% compared to a pop of 12.7% for the SPDR S&P 500 ETF Trust (SPY). The leading performance by smaller stocks indicates that risk appetite has increased.

The same trend of outperformance by smaller stocks is also seen with tactical ETFs that magnify their daily performance. 

The Direxion Daily Mid Cap Bull 3x Shares (MIDU) has surged 65.8%, the Direxion Daily Small Cap Bull 3x Shares (TNA) is ahead 47.4% and the ProShares UltraPro S&P 500 ETF (UPRO) is ahead by 39.2% year to date. All three funds use 300% daily leverage on their respective index benchmarks.

One final measure is the CNN Fear and Greed Index, which attempts to measure the mood of stock market participants. 

The Fear and Greed Index consists of seven sub-factors such as market momentum, safe-haven demand and stock price strength, among others. The current reading of 59 is closer to extreme greed levels (100) than it is to extreme fear (0). The reading has bounced around the 50 neutral level during the past month. 


The strengthening of defensive sectors, which formerly lagged, is a welcome sign for stock market bulls.

Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of "Habits Of The Investing Greats.”