Key Points
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- Banks are in Focus as Earnings Season Begins
- Growth Sectors Trade to Record Highs
- Cyclical Groups are Testing their 50-day Moving Averages
- Most Defensive Sectors Continue to Underperform
- Real Estate Bucks the Bearish Defensive Trend
Chart in Focus
Banks will be top of mind for investors this week as J.P. Morgan will get earnings season underway today. Earnings season begins with the S&P 500 Banks Index trading below the 50-day moving average after failing to hold a breakout to record highs. The relative trend has shifted to the downside, below a declining 50-day moving average. The ratio has also broken below support. Both levels are likely to provide resistance should an earnings-induced rally take place in the near-term.
Visiting the Sector Relatives
All the charts below look at the sectors of the S&P 500 on an absolute basis (top panel) and relative to the S&P 500 (bottom panel) to get a sense of the leaders, laggards, and shifts in trends. We include the 50-day moving average on each.
Information Technology
The Technology sector remains in an uptrend, trading at another new high yesterday. Near-term support is at the breakout level, near 2,550. Should that fail to hold, the rising 50-day moving average would be the next key level to watch.
Relative to the S&P 500:
On a relative basis, the ratio remains above the 50-day moving average, which is now moving higher. The group has broken above a short-term resistance level, opening the door to an attack on the September 2020 highs.
Consumer Discretionary
The Consumer Discretionary sector closed at a record high yesterday after breaking out of the consolidation that has been in place for much of 2021. Support moves up to the breakout level, near 1,430. Below that, the 50-day moving average would be the next logical level for the bulls to defend.
Relative to the S&P 500:
On a relative basis, the group remains in a downtrend, yet to break the series of lower highs and lower lows that has been in place since last October. However, the ratio continues to trade above the 50-day moving average, increasing the odds that the downtrend will be broken.
Communication Services
The Communication Services sector traded to another new high yesterday, continuing a nearly textbook uptrend from the March 2020 lows. The rising 50-day moving average is now in the support zone between 255 and 260.
Relative to the S&P 500:
Despite the clear uptrend in price, the relative ratio has not been able to sustain a breakout and establish its own bullish trend. Remaining above the 50-day moving average is a bullish development but we want to see a stronger relative trend emerge.
Materials
Materials remain below the 50-day moving average but are trying to build a base above price-based support in the 490 – 500 range. A break of this support level would likely indicate that the uptrend from the March 2020 lows has come to an end.
Relative to the S&P 500:
On a relative basis, the group remains below the 50-day moving average which is moving to the downside. The ratio is now testing the relative support level that we have been highlighting. A break of support would confirm that this group has shifted into a lagging position.
Financials
With many of the largest banks in the sector set to report 2Q earnings, this is an important week for Financials. The group continues to test the 50-day moving average from below after holding above price-based support. As always, the reaction to earnings reports will be more important than the reports themselves.
Relative to the S&P 500:
On a relative basis, the group remains below the 50-day moving average and traded below support early last week. A subsequent rally has the group testing the breakdown level. Above that, the moving average would be the next important level to overcome.
Industrials
The Industrials sector is also in the process of testing the 50-day moving average from below after holding price-based support. The absolute trend in this cyclical group is likely to remain choppy in the near-term.
Relative to the S&P 500:
On a relative basis, the group continues to move to the downside, trading below a declining 50-day moving average. More time is needed for a base to build before a shift back to leadership can take hold.
Energy
Despite strength in the underlying commodities, the Energy sector has not been able to break above price-based resistance in a meaningful way. Now, the group has also lost the 50-day moving average which is also in the resistance zone.
Relative to the S&P 500:
On a relative basis, the ratio has broken below the 50-day moving average while continuing to hold below resistance.
Consumer Staples
The Consumer Staples sector is above price-based support and is now testing the 50-day moving average. Remaining above support keeps the odds in favor of the highs being tested in the near-term.
Relative to the S&P 500:
Real Estate
Real Estate has broken the near-term consolidation to close at a record high. First support moves up to the breakout level near 285. Below that, the rising 50-day moving average is a key level that defines the current bullish trend.
Relative to the S&P 500:
On a relative basis, Real Estate tested and held the rising 50-day moving average. The ratio is above the breakout level, increasing the odds that outperformance will continue.
Utilities
The Utilities sector remains below the declining 50-day moving average, trading in a “no-man’s land” between support near the 300 level and resistance at 345.
Relative to the S&P 500:
The relative trend remains bearish, below the declining 50-day moving average. Underperformance by this defensive group is a positive datapoint for equity bulls.
Health Care
The Health Care sector traded at record levels before fading yesterday. Near-term support is at the breakout level, near 1,460, which is soon to hold the rising 50-day moving average.
Relative to the S&P 500:
On a relative basis, the group remains in a base-building process, above the 50-day moving average but below important resistance.
Take-Aways
Not much has changed at the sector level over the past week. Growth themes continue to benefit from rotation while the cyclical groups are under pressure. Defensive sectors are lagging, a confirming datapoint for equity bulls. Banks have been fading ahead of the start of earnings season.