Equity Strength Broadens;
Defensive Sectors Remain Weak

by | Oct 19, 2021

Key Points

  • Autos and Components Drive Strength in the Discretionary Sector
  • Technology Improves in the Near Term
  • Energy Remains Strong but May Need to Pause
  • Industrials Trade to a Key Relative Level
  • Defensive Sectors Trade to Long-Term Lows

Chart in Focus

Despite endless talk of chip shortages hurting the auto industry, it is precisely the S&P 500 Automobiles & Components Index that is driving the recent strength in the Consumer Discretionary sector. The index has broken to new highs after making higher lows above the rising 50-day moving average.

Relative to the broader Discretionary sector, Automobiles and Components are in an uptrend with eyes for the early 2021 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

The Technology sector has broken above the 50-day moving average after noting last week that bulls would want to see this level reclaimed quickly. Holding above the moving average opens the door to an attack on the September highs. Support remains at the 2,600 level.

Relative to the S&P 500

The relative trend has improved over the past week but remains trapped between support and resistance, keeping performance in the neutral camp. A break of resistance would signal that Technology is reclaiming a leadership position. Losing support would point to further underperformance.

Consumer Discretionary

The Consumer Discretionary sector has broken above the 50-day moving average and has continued to new all-time highs. This breakout out prompts us to convert resistance at the 1,490 level into near-term support, where we would expect pullbacks to find buyers.

Relative to the S&P 500

On a relative basis, Discretionary has made a decisive break above the 50-day moving average and the downtrend line. At the same time, the interim highs from July have been broken, signaling that a new trend of outperformance is beginning.

Communication Services

The Communication Services sector remains below the declining 50-day moving average as it has not been able to gain the same upside traction as Technology and Discretionary. The 260 level remains important as a break below would signal an end to the uptrend that has been in place since March 2020.

Relative to the S&P 500

The relative ratio remains below the declining 50-day moving average and the rising trend line from the 2021 low. Until these levels are reclaimed, it is hard to make a case for leadership by this group.

Materials

The Materials sector continues to rebound from price-based support, closing above the 50-day moving average. The group is testing the declining trend line from the spring highs. Breaking this level would point to a test of those highs.

Relative to the S&P 500

On a relative basis, Materials continue to show signs of stabilization. They are trading on price-based and moving average support. Clearing the August high would serve to shift this group back to a leadership position.

Financials

The Financials have broken from the consolidation zone that we have been highlighting for the past few weeks. The group remains above the rising 50-day moving average and has been making higher lows since July. We have moved support up to the breakout level, where we would expect buyers to materialize to defend near-term pullbacks.

Relative to the S&P 500

The relative trend is holding above resistance and the rising 50-day moving average. This dynamic keeps the odds in favor of an attack on the June high. This view is unchanged from last week.

Industrials

The Industrial sector has moved above the 50-day moving average but remains in the consolidation that has been in place since April. Support is at 830, while resistance is near the all-time highs. Until there is a break in either direction, our stance on the group is neutral.

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, while losing support would likely lead to further underperformance.

Energy

The Energy sector continues to hold the breakout that we highlighted last week. Arguably, the group is extended from the 50-rising 50-day moving average, and we would not be surprised to see some stalling above the 410 – 420 support zone.

Relative to the S&P 500

The relative trend is beginning to pause at resistance while remaining above the rising 50-day moving average. Energy bulls want the resistance zone to be overcome quickly to have confidence that leadership will continue.

Consumer Staples

The Consumer Staples sector is fading from price-based and moving average resistance as it remains in a consolidation after a false breakout.

Relative to the S&P 500

The relative trend remains bearish, trading near 20-year lows after failing last week’s test of the declining 50-day moving average.

Real Estate

Real Estate is trying valiantly to break price-based and moving average resistance after rebounding from support. A move above 295 would set the stage for a run back to record highs.

Relative to the S&P 500

On a relative basis, the group is below the 50-day moving average, holding important price-based support. This level should be watched closely. Until there is a break, we would expect the group to be an inline performer.

Utilities

The Utilities Sector continues to hold the zone between 320 and 325 but has not been able to maintain upside traction on rally attempts, remaining below the declining 50-day moving average. The larger trend remains a broad, sloppy 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

The rally attempt on the part of Health Care can best 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. Last week we wrote that odds favored a test of the 2021 lows. Those lows have now been breached, and the ratio is trading near levels last seen in 2010.

Take-Aways:

Technology and Discretionary have shown signs of improvement over the past week as equity market strength broadens to these offensive sectors. Cyclicals remain strong, but we would not be surprised to see leaders such as Energy and Financials pause within their uptrends. Defensive groups remain relative laggards, a largely bullish data point for the equity market.

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.