Restaurant stocks are breaking down. That's an 'ominous' sign for a 'late-cycle market.'

By William Watts

Weakness 'seems to confirm there are clearly some issues with this group, and likely the consumer at large': BTIG's Krinsky

Restaurant stocks are giving nervous investors heartburn this summer, underlining growing concerns about the health of the market outside of the tech heavyweights that are driving a broader rally on optimism over artificial intelligence.

The Russell 3000 Restaurant Index was down nearly 2% on Monday, taking it below its May low to a level last seen in November, said Jonathan Krinsky, chief market technician at BTIG, in a Monday afternoon note. Since March, when BTIG warned the group was vulnerable, it has dropped around 6%, while the S&P 500 SPX has rallied around 6% over the same stretch, he noted.

Flagging restaurants join home builders, industrials, materials, the equal-weight consumer-discretionary index and other ailing sectors, making it hard to look past the damage, Krinsky wrote.

"Like many consumer related parts of the market, we are reaching a point where these groups no longer look like opportunities for catch-up, and rather look like an ominous sign for a late-cycle market," he said.

Noting that it's been nearly a year since the Federal Reserve's last rate hike and around eight months since the peak in long-dated Treasury yields, Krinksy said areas like restaurants, outside of a few "idiosyncratic" names, continue to move lower.

He emphasized that the relative trend for restaurants to the rest of the market has been moving lower for over a year, meaning that it isn't a signal by itself. In contrast, the recent breakdown in absolute terms "seems to confirm there are clearly some issues with this group, and likely the consumer at large."

-William Watts

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07-01-24 1619ET

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