Energy and Financials
Emerge as Leaders

by | Oct 5, 2021

Key Points

  • Technology at a Key Level as Breadth Becomes “Washed Out”
  • Energy and Financials Are Winning the Rotation Game
  • Materials and Industrials Have More Work to Do
  • Defensive Groups Reach Support but They Can’t Lead in a Down Tape
  • Discretionary Is Fighting a Bearish Relative Trend

Chart in Focus

Below, we highlight how the Information Technology sector is testing support at the 2,600 level. At the same time, the percentage of stocks in the sector trading above their respective 50-day moving averages has fallen below 15%. This is the lowest level for this metric in the past two years, aside from the COVID lows. Since that time, trips below the 25% mark have been few and short-lived. The case can be made that breadth is becoming washed out for the group. If a rebound is going to take place, this is the spot.

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 has remained under pressure since breaking below the 50-day moving average, which is now beginning to move lower as well. Support at the 2,600 level is in the process of being tested. Should that give way, the next likely objective is a move down to 2,510.

Relative to the S&P 500

The relative trend is also testing support as it trades in a consolidation, below the declining 50-day moving average. At best, we classify Technology as an in-line performer. Breaking support would be a signal of further underperformance.

Consumer Discretionary

The Consumer Discretionary sector is having a hard time holding above the 50-day moving average as it trades in an ongoing consolidation. Price-based support near 1,400 continues to be 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.

Communication Services

The Communication Services sector has eyes for the next support level at 260 after breaking below the 50-day moving average. The case can be made that the steady uptrend is reversing. A break of the 260 level would confirm this view.

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. Until these key levels are retaken, odds favor continued underperformance.

Materials

The Materials sector continues to dance with price-based support near the 490 level but remains below the 50-day moving average as the consolidation continues. Our view from last week still holds: Until there is a decisive break one way or another, we are content to watch the battle raging within the consolidation zone.

Relative to the S&P 500

On a relative basis, however, there are signs of life. The ratio is pushing up against resistance and the 50-day moving average. Breaking these key levels will be the first step in shifting to a leadership position.

Financials

The Financials continue to trade in the upper portion of the consolidation zone, just below the highs near 650. Thus far, the rising 50-day moving average has provided support to near-term weakness. Holding the moving average increases the odds of a break to new highs.

Relative to the S&P 500

The relative trend is breaking above resistance after holding the 50-day moving average, opening the door to an attack on the highs from May and June.

Industrials

The Industrials continue to test/hold price-based support but remain below the 50-day moving average. A break of support sets the stage for a swift move down to the 750 level.

Relative to the S&P 500

The relative trend is trying to move higher after holding support. The ratio remains below the declining 50-day moving average, which must be overcome if the group is to take a leadership position in the market.

Energy

The Energy sector continues to power higher, above the rising 50-day moving average, setting its sights on the 2021 highs.

Relative to the S&P 500

The relative trend is also moving to the upside, with room to the next resistance point. The ratio is above the rising 50-day moving average, which should act as support to pullbacks in the near term.

Consumer Staples

The Consumer Staples sector has fallen to support after breaking below the 50-day moving average, a scenario that we pointed out as likely in this note last week. Weakness since the highs has done a fair amount of damage to the group, and time will be needed for repair.

Relative to the S&P 500

The relative trend remains bearish, trading near 20-year lows, below the declining 50-day moving average. Interestingly, this defensive group has not been able to mount a relative comeback as the broader market has come under pressure.

Real Estate

Real Estate has fallen to price-based support after breaking below the 50-day moving average. This is a logical spot for a rebound to take hold to try to retake the 285 level and then the moving average.

Relative to the S&P 500

On a relative basis, the group is trying to retake the 50-day moving average. If this level is overcome, price-based resistance will be the next test.

Utilities

The Utilities Sector has traded into a support zone after a precipitous decline from recent highs. The decline keeps the group in a sloppy consolidation below the declining 50-day moving average. While a short-term rebound can’t be ruled out, it is hard to get excited about the prospects for Utilities until a sustained break above the moving average take hold.

Relative to the S&P 500

The relative trend is attempting to rebound but remains below the 50-day moving average. For now, the trend is bearish.

Health Care

The Health Care sector remains below the 50-day moving average and is now testing support at the 1,470 level that we highlighted last week. If a rebound were to take hold, this is a good place for it to begin.

Relative to the S&P 500

On a relative basis, Health Care has given up the 50-day moving average after failing to break above resistance. More time is needed for this group to build a relative base.

Take-Aways:

Cyclical parts of the market have shown the most relative improvement of late, and groups such as Energy and Financials are moving into leadership positions. Despite weakness in the broader market, defensive sectors are not leading, arguably something that equity bulls can use to make the case that more severe damage is not likely for equities. Weakness in the Technology, Discretionary, and Communication Services sectors is the wild card. These groups contain many of the largest stocks in the market. Can the S&P 500 and NASDAQ 100 make much upside progress without them? 
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.