Trading Desk: Defensive Sectors Have Run Out Of Room

The fear trade was a blessing for Wall Street’s most defensive themes, but lately it’s becoming clear that real money is once again finding the safe havens too crowded and more than a little limited in terms of near-term return potential.

Most sector charts actually look bullish now. One way or another, consumer discretionary and technology stocks have collectively broken last year’s steep down trends. If they can hold onto even a portion of their recent gains, they’re set up for a real rally ahead.

That means Microsoft (MSFT) as well as Amazon (AMZN) and Tesla (TSLA). And although Meta (META), Alphabet (GOOG) and Netflix (NFLX) are no longer officially “technology” stocks, the communications sector is defiantly on its way back now.

Those stocks were so battered that I wouldn’t be shocked if the next upswing takes them up another 30% at least before they need to rest. Their recent dip looks like a buying opportunity.

But that’s also true of energy. Get real. Exxon (XOM) has come a long way but it can still come a long way further.

While charts like this are rare on Wall Street right now, they’re always magical because they climb as far as they can. There’s nothing technical to get in their way . . . yet.

If nothing else, Big Energy is now a trading opportunity. Buy the dips and see how many percentage points of profit you can accumulate before the stocks hit their heads. Repeat.

I’m only really bearish on three sectors right now. They’re all “defensive.” Healthcare as a whole did extremely well last year but failed to participate in last month’s rally.

Go back a little further and you’ll see the sector hit a ceiling about 7% up from here. That’s the limit of absolute fear . . . when the safety trade on Big Pharma gets as crowded as it can.

That’s not really exciting unless you have a trading orientation or need to feel safe. In the latter scenario, enjoy your 7% . . . and make sure to leave the haven early.

The utilities, meanwhile, have completely broken down. Fear is over. And while consumer products (think Big Food and Walmart) have done a little better, they’re stuck between inflation eating their margins alive and the shadow of a potential recession cutting into sales.

Again, unless you’re really terrified, don’t bother. And if you’re nervous, consider parking some cash in real estate stocks . . . which pay better yields and are still deeply depressed from last year’s losses.

Current income is the hallmark of every “safety” stock. But the chance to earn big capital gains should never be far from your mind. If the real estate sector even recovers its summer peak, you’ll make 10% plus the equivalent of 3% a year.

That’s a haven with a little heat inside. And of course, if you want something more expansive than that, the rest of the market is now wide open.