Bounces Have Been Sold in Many Sectors as Upside Traction Remains Elusive

by | Oct 12, 2021

Key Points

  • Odds Favor a Rebound in Real Estate
  • Energy & Financials Beginning to Pause after Strong Rallies?
  • Will Leadership Simply Mean “Less Bad” for Materials and Industrials?
  • Utilities Trade Near All-Time Relative Lows
  • Staples Try to Carve Out a Relative Bottom

Chart in Focus

While the Real Estate sector is testing support, it is interesting to note that the percentage of stocks in the sector trading above their respective 50-day moving averages has already begun to rebound. The metric currently stands at 44%, up from 14% on September 30th. This divergence increase the odds that support will hold, and the group will break above the downtrend line from the early September highs.

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

After holding first support at the 2,600 level, the Technology sector is beginning to fade below the 50-day moving average. Since making a high in early September, the group has been making lower highs and lower lows, and a break of first support would open the door to a move down to 2,510. Technology bulls want to see the 50-day moving average reclaimed quickly.

Relative to the S&P 500

The relative trend has also held support in the near term but remains below the 50-day moving average. Until the moving average is broken to the upside, odds favor inline performance at best. Breaking support would put Technology in the lagging camp.

Consumer Discretionary

The Consumer Discretionary sector continues to dance with the 50-day moving average as it trades in an ongoing consolidation. Price-based support near 1,400 remains the key level for the consolidation. Resistance is near 1,490.

Relative to the S&P 500

On a relative basis, Discretionary is holding above the downtrend line after breaking above the declining 50-day moving average. However, there is still more work that must be done to change the course of the declining trend. This view is unchanged from last week.

Communication Services

As with the Technology sector, the Communication Services sector is beginning to fade after a short rebound. The group remains below the 50-day moving average, which has shifted from rising to flat over the past two weeks. Support at 260 is the key level for the longer-term uptrend.

Relative to the S&P 500

The relative ratio remains below the 50-day moving average and the rising trend line from the 2021 low. At the same time, the moving average is no longer rising. Until these levels are reclaimed, it is hard to make a case for leadership by this group.

Materials

The Materials sector has also rebounded from price-based support but remains below the declining 50-day moving average. Additionally, since May, the group has been making lower highs, a sign that sellers are becoming more aggressive on rally attempts. A break of 490 would open the door to further weakness, down to the 410 level.

Relative to the S&P 500

On a relative basis, Materials are showing signs of stabilization. The group is sitting just below price-based resistance and the 50-day moving average. We are closely watching for a breakout and shift to leadership. However, we must wonder if leadership simply means less bad in this case.

Financials

The Financials tried to breakout yesterday before fading back into the consolidation zone. The group remains above the rising 50-day moving average and has been making higher lows since July. Pullbacks to the moving average are likely to find support in the near term.

Relative to the S&P 500

The relative trend holds above resistance and the rising 50-day moving average. This dynamic keeps the odds in favor of an attack on the June high.

Industrials

We can add the Industrials to the list of sectors that have staged a rebound from support but are now fading below the 50-day moving average.  A break of support at 830 would put the group in a position to move down to 750.

Relative to the S&P 500

The relative trend is testing the underside of the 50-day moving average after holding price-based support. A break of the moving average would point to continued leadership, but again, we must wonder if leading means declining less than the overall market.

Energy

The Energy sector scored a breakout on Friday with follow through early in the day yesterday. However, early strength gave way to afternoon selling, leaving what candlestick aficionados would call a possible “shooting star” pattern on the chart. Pullbacks are likely to find support in the 410 – 420 zone, well above the 50-day moving average.

Relative to the S&P 500

The relative trend continues to move to the upside and is now testing a resistance zone. It would not be surprising to see some stalling activity in the near term, but remaining above the 50-day moving average would keep the ball in the outperformance camp.

Consumer Staples

The Consumer Staples sector has rebounded from support but has not been able to build on strength to break above price-based and moving average resistance. Until these levels are broken to the upside, we should continue to expect the group to trade in a choppy consolidation.

Relative to the S&P 500

The relative trend remains bearish, trading near 20-year lows, but we note that the 50-day moving average is being tested from below. More time is needed to determine if this defensive group can sustain a move to the upside.

Real Estate

Real Estate is playing a game of ping pong between support and resistance, below the declining 50-day moving average. Yesterday saw support hold once again, but a retaking of the moving average is needed to break the short-term downtrend.

Relative to the S&P 500

On a relative basis, the group is below the 50-day moving average, testing important price-based support. This level should be watched closely.

Utilities

The Utilities Sector has moved back into the support zone between 320 and 325 after a rally attempt ran out of steam below the declining 500-day moving average. Odds favor a continuation of the choppy consolidation.

Relative to the S&P 500

The relative trend remains bearish, below the declining 50-day moving average and near all-time lows.

Health Care

While many groups made a rally attempt before fading back to support, the bounce in Health Care can only be described as feeble. The sector remains below the 50-day moving average and is testing support at the 1,470 level. A break of this level opens the door to a move down to 1,400.

Relative to the S&P 500

On a relative basis, Health Care remains weak, trading below the 50-day moving average. Odds favor a test of the 2021 lows.

Take-Aways:

Many of the major sectors of the S&P 500 tried to rally last week, but those rallies were met with supply that pushed them back toward important support levels. Energy and Financials remain the best of the bunch, and there has been some relative improvement for Materials and Industrials. Technology and Communication Services continue to stagnate while defensive sectors have not gained much relative traction.
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