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Key Points

  • Finding Pockets of Strength in Consumer Discretionary
  • Communication Services Remains Impressive
  • Cyclical Sectors Face a Test of Resistance
  • Defensive Groups are Not Showing Relative Strength
  • Health Care is on the Verge of Confirming Leadership

Chart in Focus

While one big holding weighs on the Consumer Discretionary sector, drilling down on the group reveals some pockets of new strength. The S&P 500 Automobiles Index is reversing to the upside after spending much of 2021 under pressure. The index has moved above the downtrend line, and the 50-day moving average has recently begun to move higher as well.

Relative to the S&P 500, Autos are showing signs of outperformance with the ratio trading above the rising 50-day moving average after making a higher low.

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 continues to trade near record highs, above the breakout level and the rising 50-day moving average. Above 2,500, the structure of the uptrend from the March 2020 lows remains intact. Shorter-term support moves up to the 2,600 level, in line with recent consolidation lows and the moving average.

Relative to the S&P 500

On a relative basis, the ratio also remains above the 50-day moving average, and the near-term breakout level. Above these measures of support, the odds favor Technology continuing to outperform. A key test would be highs from last September.

Consumer Discretionary

The Consumer Discretionary sector has pulled back from record levels but is holding price-based support just above the rising 50-day moving average. Upside traction remains elusive and likely was not helped by AMZN’s bearish response to their earnings release last week. 

Relative to the S&P 500

On a relative basis, the group remains in a downtrend and has lost the 50-day moving average to the downside. More time is needed for a relative base to build.

Communication Services

The Communication Services sector is pulling back from record levels but remains in a textbook uptrend, printing a consistent pattern of higher highs and higher lows. The group is above the rising 50-day moving average and has support in the 255 – 260 zone.

Relative to the S&P 500

The relative ratio is holding the breakout that took over a year to achieve and is trading above the rising 50-day moving average. This group remains one of the leaders in the current bullish equity trend.

Materials

Last week we wrote that the declining 50-day moving average would likely act as resistance to the rally attempt for the Materials sector. Thus far, that appears to be the case. Price-based support, near the 500 level, must hold to keep the current consolidation from shifting to a bearish trend.

Relative to the S&P 500

On a relative basis, the group remains below the 50-day moving average which is declining. The ratio continues to hold 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

As with Materials, Financials are meeting resistance at a downward sloping 50-day moving average. Price-based support is near 580 and must hold to keep the current consolidation in play. A break below that level opens the door to a move down to the 520 level.

Relative to the S&P 500

On a relative basis, the group remains below the 50-day moving average and support.

Industrials

The Industrials sector remains in a consolidation, unable to surpass the flat 50-day moving average, just above price-based support.

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. The next support level is around the January lows.

Energy

The Energy sector remains trapped. Former support, at the 2019 lows, has proven to be new resistance. Recent weakness found demand at the peak from the initial rally from the March 2020 low. The 50-day moving average continues to move lower.

Relative to the S&P 500

On a relative basis, the ratio remains below the declining 50-day moving average and price-based resistance.

Consumer Staples

The Consumer Staples sector is above price-based support and the rising 50-day moving average after setting another record high last week.

Relative to the S&P 500

On a relative basis, the group remains below the declining 50-day moving average and near recent lows. More time is needed for a reversal to take hold.

Real Estate

Real Estate traded to a record high last week after testing and holding price-based support above the rising 50-day moving average.

Relative to the S&P 500

On a relative basis, the group has found support at the rising 50-day moving average as it trades between support and resistance.

Utilities

The Utilities sector is holding above the 50-day moving average between support near the 300 level and resistance at 345.

Relative to the S&P 500

The relative trend remains bearish, but the ratio is now testing the declining 50-day moving average from below. However, it will take a break of resistance to have confidence that a change of trend has taken place.

Health Care

The Health Care sector continues to grind higher, above support at the breakout level near 1,460. The rising 50-day moving average has moved above this breakout level, defining the current bullish trend. Above 1,460, the uptrend from the March 2020 lows remains in place.

Relative to the S&P 500

On a relative basis, the group has held the 50-day moving average, which has shifted from declining to flat. Resistance is now being tested and a break above would confirm Health Care’s position as a market leader.

Take-Aways:

We remain most impressed by the absolute and relative trends of the Communication Services sector as the group benefits from the current rotation that has favored many of the Large Growth stocks in the market. After that, we are on watch for a relative breakout in the Health Care sector. Cyclical sectors (Materials, Financials, and Industrials) are testing resistance and have clearly defined levels below which we can say that their trends have turned bearish. Defensive groups are not exhibiting the type of relative strength that would cause us to question a bullish view on the equities.

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.