The DALI sector rankings reveal an interesting position with energy and technology at the top. Today we observe what that might mean heading into the back half of the year.
Most of you are familiar with DALI, which ranks assets based purely on their relative strength against other members of the universe. In full, the Dynamic Asset Level Investing (DALI) tool can help visualize where strength and weakness is emerging across the investable universe at any point in time. The flexibility of DALI’s matrix-based backing gives us the ability to run several different “flavors” of tests, helping key you in on strength across asset classes, sectors, size and style groups, etc. All that to say, keeping track of changes over time within the DALI rankings can help guide your hand when it comes to focusing in on RS within your portfolio.
While today’s feature won’t focus on the broader asset class rankings, it is worth noting that DALI still remains largely focused on risk-on assets. Equity-oriented areas remain towards the top of the rankings, with a crude/industrial metals led commodities group rounding out the top half of the rankings. Today’s feature will focus on the unique position of the current sector rankings, which are included below. In terms of “overweights” from a sector perspective (demarked by the top three of overall rankings) DALI is suggesting a preference for technology, energy & industrials. Our “underweights” (that being the bottom three in terms of overall ranking) being consumer staples, consumer discretionary, and real estate.
From a conversational perspective, having both consumer staples and consumer discretionary options at the same side of the rankings is quite an interesting position. We have been taught historically that staples do well in times of unrest, while times of economic prosperity are accompanied by a strong consumer and therefore, discretionary sector. If your “gut” told you having both as technical underweights in DALI was rare, you would be right. In fact, besides 2026 (this instance started in late February) there have only been three other instances since 2001 during which both consumer discretionary and consumer staples ranked in the 9th position or below. Forward returns for representatives XLY & XLP are included below, as well as returns for benchmark SPX. While hit rates aren’t as convincing past six months (this makes sense as sector rotation naturally occurs), those sectors have continued to underperform most of the time over the next quarter or so. Admittedly, the sample size is small, but the main takeaway should be the fact that it is quite rare to see a traditionally risk-off staples and risk-on discretionary performing equally as relatively poor against other areas of the market.
Equally as rare have been instances during which both energy and technology were at the top of the rankings. Again, this makes sense from a high level- energy is typically one of the more “uncorrelated” assets to general market movement, while technology’s influence has become increasingly significant on every day market movement. Other instances include early 2022 (bad for tech, good for energy), May of 2020 (good for both) and March of 2021 (good for both). We have never seen energy and tech as overweights while consumer discretionary and staples are underweights in our 25 year ranking history. While technology upside has stagnated slightly as of this point on 6/10, both groups remain somewhat strong. XLE (pictured below) maintains a strong 4.45 fund score, having rattled off a string of four consecutive buy signals on its default chart since December. While it trades off 2026 highs and the argument can be made its reliance on news headlines is heightened with conflict in the Middle East, its overall technical picture remains quite defendable with various layers of support in the mid-$50’s.
Remember, it is our job to contextualize market movement for our clients. While today’s current rankings may be historically rare, they make sense in today’s AI, energy headline driven market environment. While sitting at the top (or bottom for that matter) of the rankings by no means guarantees out/underperformance, it can be useful to contextualize current positioning of strength within your portfolio.
