Key Points

    • Weakness in Consumer Discretionary is Broad
    • Cyclical Sectors Pause but Still Hold the Lead
    • Technology Starts a Relative Rebound, Has a Lot of Work to Do
    • Defensive Sectors Need More Time to Build Bases
    • Watching Health Care Closely

Chart in Focus

Below, we highlight the breakdown in the Consumer Discretionary sector on a relative basis. Here we can see one of the biggest drivers of that underperformance is the S&P 500 Textile Apparel & Luxury Goods Index. The group has been moving sideways since early January and is now trading below a flat 50-day moving average. However, it is the relative trend that tells the story. The ratio is below the declining 50-day moving average, which acted as resistance to a recent rally attempt. Yesterday, the group made a 21-day relative low.

*Note that Specialty Retail, Leisure Products and Household Durables all made 21-day relative lows yesterday as well.

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.

Technology

The Information Technology Sector has regained the rising 50-day moving average following a rebound over the past week. Thus far, the absolute trend remains to the upside, as a lower low has not been established. Support remains in the 2,200 – 2,250 zone on the downside. Resistance is in the area of all-time highs near 2,525.

Relative to the S&P 500:

On a relative basis, Technology continues in a downtrend, below the declining 50-day moving average. The ratio is testing broken support (now resistance) from below. A break above the moving average would be a good first step in reversing the relative downtrend.

Consumer Discretionary

The Consumer Discretionary sector, at best, can be described as in a consolidation, as it trades below the 50-day moving average and the record highs which were reached earlier this month. Closing above the moving average would open the door to a retest of the highs, below the moving average keeps the odds in favor of a move toward the 1,300 level.

Relative to the S&P 500:

The relative trend remains to the downside and has weakened further with a break of the support level that we have been highlighting. The ratio continues to trade below the declining 50-day moving average.

Communication Services

The Communication Services sector has staged a strong rebound from support at the rising 50-day moving average. The trend remains to the upside and the stage is set for an attack on the highs. Support moves up to the 240 – 245 range this week.

Relative to the S&P 500:

On a relative basis, Communication Services have not been able to maintain much upside traction. The ratio remains in a consolidation, oscillating around the 50-day moving average, and unable to break to new highs.

Materials

Materials continue to trade above the rising 50-day moving average, which is logical support for the current uptrend. The group has been consolidating since making a high on May 7th but has not reversed in a way that calls the bullish trend into question.

Relative to the S&P 500:

On a relative basis, Materials are pulling back after trading to new highs on May 17th. The ratio is firmly above the rising 50-day moving average and has near-term support at the breakout level.

Financials

Like the Materials sector, Financials are consolidating recent gains within the context of a bullish trend. The group is trading above the rising 50-day moving average and price-based support near the 580 level.

Relative to the S&P 500:

Financials are testing support at the breakout level and trading above the rising 50-day moving average. The uptrend from the November low remains in place. A bigger test still looms at the 2019 highs.

Industrials

The Industrials sector is turning higher after finding support at the rising 50-day moving average to keep the uptrend in place on an absolute basis. Above support, in the 830 – 840 range, the odds favor a test of the all-time highs.

 

Relative to the S&P 500:

The relative trend has shown signs of stalling as of late. Price-based and moving average support are in the process of being tested. Should support hold, the next key test will be in the area of the 2019 highs.

Energy

The Energy sector remains trapped between support and resistance. There is a slight tilt in favor of the bulls as the group trades above the 50-day moving average. For now, this can be described as a consolidation within the uptrend that has been in place since November. A break of the 415 level would likely target 470. On the downside, a close below 340 would be a sign that the uptrend has run its course.

 

Relative to the S&P 500:

On a relative basis, resistance continues to hold. The ratio is testing the 50-day moving average as the slow reversal of the downtrend continues to play out.

Consumer Staples

The absolute trend for Staples is bullish, as the group trades above the 50-day moving average and near record highs. Support is near the breakout level in the 690 – 700 range.

Relative to the S&P 500:

Last week we were open to the idea that this “defensive” group was gaining traction on a relative basis. While that still could be the case, as the ratio trades above the 50-day moving average, it seems that more time is needed for a meaningful change of trend to take place. Look for a break of resistance to signal that this transition is complete.

Real Estate

Of all the “defensive” sectors, Real Estate remains the strongest trend, holding above the breakout level and trading near record highs. Price based support is near 260, a level that is likely to include the rising 50-day moving average in the next few trading days.

 

Relative to the S&P 500:

The relative trend in Real Estate continues to slowly shift to the upside. The ratio is above the rising 50-day moving average, and a move through resistance would complete the trend change.

Utilities

The Utilities sector recently found support at the rising 50-day moving average but remains trapped below near-term resistance at the 345 level. Above that, the next test would be in the area of the pre-pandemic highs near 360.

Relative to the S&P 500:

The relative trend remains uninspiring, bouncing along the bottom and back below the 50-day moving average. We would become more interested in this group should relative resistance be broken.

Health Care

The Health Care sector traded to a new high on Friday, continuing to move higher after breaking out in the middle of April. Near-term support is likely at the rising 50-day moving average, and price-based support is in the 1,370 – 1,390 zone.

Relative to the S&P 500:

The relative trend is flat as the base-building process continues. The ratio is above the 50-day moving average, which has shifted from declining to flat. A break of resistance would increase conviction that a relative turn is underway. We are watching closely.

Take-Aways

The relative trends continue to favor the cyclical sectors of the market. There has been a small improvement in the trends for Technology and Communication Services, but more work is needed to sound the all clear on these growth-focused groups. Last week we were open to continued improvement in the defensive sectors, but more time is needed for these relative trends to complete the bearish-to-bullish transition.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.