The industrials-staples sentiment flip in the current market

Key points:

• Industrials' sentiment relative to consumer staples shifted violently in a single day.
• Historically, similar signals have been followed by unusually weak returns, with many cases falling inside the last two major bear markets.
• After removing repeat signals and separating the S&P 500's long-term trend, the historical results diverge sharply.

Industrials' sentiment flipped in a day

Industrials are among the more cyclically sensitive parts of the market. Manufacturing, transportation, and capital equipment demand move with economic activity, while consumer staples demand stays relatively stable. That makes the two sectors a useful pair for watching shifts in risk appetite.

When expectations for growth improve, investors tend to favor cyclical sectors such as industrials. When the outlook deteriorates, the defensive qualities of staples carry more weight.

So when industrials' sentiment improves sharply while staples' weakens, the natural reading is that risk appetite is improving.

Recently, that number moved violently. XLI Optix rose 28.51 points in a single day and XLP Optix fell 32.04, pushing the one-day change in the spread above 60.

Such a sharp shift i