False Moves Across the Cyclical Sectors
as the Curve Flattens

by | Nov 30, 2021

Key Points

  • A Flattening Curve Confirms Cyclical Weakness
  • Technology and Discretionary Remain Leadership
  • Communication Services Are a Relative Mess
  • Cyclicals Lose Their Breakout Levels
  • Utilities and Staples Are Worth Watching Here

Chart in Focus

In our Note yesterday, we highlighted the flattening yield curve as a data point that we are watching closely. As many investors position for “reflation” and continued economic growth, “the curve” appears to be sending a different message. Here we can see the 2/10 Curve breaking below support to make a lower low. We can also see that the 63-day Slope is below zero, a condition that tends to favor the growth themes in the equity market.

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 uptrend in Technology remains in place with the index above the rising 50-day moving average and key support at the 2,810 level that we have been highlighting. We can now add a short-term support level near 2,900 following yesterday’s reversal from the Friday swoon.

Relative to the S&P 500

The relative trend is also firmly in place after taking out the highs from September 2020. The ratio is above the rising 50-day moving average and price-based support. If these levels hold, Technology is likely to continue to lead.

Consumer Discretionary

The Consumer Discretionary sector has pulled back from record levels but remains above support near 1,600 as well as the rising 50-day moving average.

Relative to the S&P 500

On a relative basis, Discretionary is above the short-term breakout level. The next test is the highs that were reached earlier this year. The rising 50-day moving average points to a bullish trend that is likely to persist.

Communication Services

The Communication Services sector continues to trade below the declining 50-day moving average as it tests price-based support near 265. A break below this level will serve to turn the trend to the downside, leading to further declines.  

Relative to the S&P 500

Even though the group has not broken down on an absolute basis, the relative trend has been clear for some time. It is bearish, below the declining 50-day moving average, and odds favor a test of the early 2021 lows.

Materials

It appears increasingly likely that the early November breakout for the Materials sector was a false move as support at the breakout level has given way. The group will now test the rising 50-day moving average as it trades in the consolidation that has marked trading since April.

Relative to the S&P 500

On a relative basis, Materials remain neutral, but we note that the ratio is in the process of moving below the 50-day moving average. It would not be a surprise to see further weakness in this ratio.

 

Financials

The Financials continue the battle with support at the breakout level as well as the rising 50-day moving average. In our Note yesterday, we noted that the yield curve appeared to be flattening. Should this continue, we would expect these rates-sensitive groups to come under pressure.

Relative to the S&P 500

The relative trend remains below the 50-day moving average as it tests important support. A breakdown points to a new trend of underperformance.

Industrials

The Industrial sector has also closed below the breakout level and has pulled back to test the ring 50-day moving average. The group is back in the consolidation that began in April and will now have to battle hard to re-establish a bullish trend.

Relative to the S&P 500

The relative trend has broken support at the 2021 lows and is below the 50-day moving average. The group is likely to see further underperformance.

Energy

Energy is fighting to hold the 50-day moving average just below price-based support. The group will have to fight hard to re-establish a bullish trend, especially with Crude Oil under pressure.

Relative to the S&P 500

The relative trend remains below resistance and the 50-day moving average. For now, the trend is neutral but with a bearish bias.

Consumer Staples

Consumer Staples have lost support at the 740 level and are back in their consolidation zone above the rising 50-day moving average. 

Relative to the S&P 500

The relative trend remains weak as it begins to reverse from the 50-day moving average. A break above the moving average would begin to confirm the view that we expressed on Friday about declining risk appetite in the market.

Real Estate

The Real Estate sector is holding above its breakout level and the rising 50-day moving average in what may be a sign of haven demand for this traditionally defensive sector of the market.

Relative to the S&P 500

On a relative basis, the group has regained the 50-day moving average, which is converging on price-based support. Until there is a break from the current consolidation, Real Estate is an inline performer.

Utilities

Utilities continue to trade in consolidation while holding above the 50-day moving average. The case can be made that there is an upside bias to the trend, but there is a clear resistance level that must be overcome before a stronger bullish case can be made. This view is unchanged on the week.

Relative to the S&P 500

The relative trend remains bearish, below the declining 50-day moving average, but we note a slight uptick of late. A move above the 50-day would be a signal that investors are increasing their defensive stance in the market.

Health Care

Health Care is holding below short-term support but remains above the 50-day moving average. Below the moving average, the October lows are in play.

Relative to the S&P 500

On a relative basis, Health Care is trading below the steadily declining 50-day moving average.

Take-Aways:

A flattening yield curve is likely to be supportive of further outperformance on the part of Technology and Discretionary. At the same time, it confirms the “False Moves” that are taking place across the cyclical sectors of the 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.