Leadership
Begins to Emerge

by | May 4, 2021

Key Points

Materials and Financials appear to be reasserting their bullish relative trends, stepping forward in what has been a leaderless market for the past few weeks. Former leaders, Technology and Discretionary, continue to fade on a relative basis. Defensive sectors are showing early signs of bearish to bullish relative trend changes.

Key Chart

Relative weakness in the Technology Sector is not confined to the largest names. The S&P 600 InformationTechnology Sector (small cap tech) traded to a 21-day relative low yesterday and is below the declining 50-day moving average (bottom panel). The absolute trend is neutral, trading in a consolidation but below a 50-day moving average that is beginning to turn lower. 

Visiting the Sector Relatives

All the charts below will look at the individual sector indexes on an absolute basis (top panel) and relative to the S&P 500 (bottom panel) to get a sense of leaders, laggards, and shifts in trends. We include the 50-day moving average on each.

Materials

The S&P 500 Materials Sector traded to a new high once again yesterday, as the steady uptrend, above the rising 50-day moving average continues. Support is in the 480 – 500 range and there is potential upside to the 620 level.

Relative to the S&P 500:

The Materials Sector has broken up and out of the consolidation that has been in place since the start of the year. After holding support at the 50-day moving average, Materials traded to a new 21-day relative high yesterday.

Communication Services

The Communication Services Sector is trending higher, above the 50-day moving average which has acted as support to pullbacks during the uptrend. Price-based support can be found at the 220 level. On the upside, there is room to the 290 level.

Relative to the S&P 500:

The Communication Services Sector remains in a wide, choppy, range relative to the S&P 500 and is in the process of being turned away from the top end of that range. The 50-day moving average is turning higher but, thus far, a relative breakout has been elusive.

Financials

The Financials Sector remains in an absolute uptrend, above the rising 50-day moving average. The group has price-based support near 570 in the near-term. On the upside, there is potential for the index to move to the 670 level.

Relative to the S&P 500:

On a relative basis, the Financials have begun to turn higher from support and have regained the rising 50-day moving average. Financials traded to a new 21-day relative high yesterday.

Industrials

The Industrials Sector is trending higher, above the rising 50-day moving average and traded at a new high yesterday. Near-term support is in the area near the moving average (800 – 825). On the upside, there is potential for the group to reach the 905 mark.

Relative to the S&P 500:

Industrials are holding support at the rising 50-day moving average and are now testing the top of the consolidation zone that has been in place since November.

Technology

The Technology Sector is pulling back from record levels but remains above near-term support and above the rising 50-day moving average. More important support for the absolute trend is near the September highs. Above support, there is upside to the 2,790 level.

Relative to the S&P 500:

Technology continues to consolidate on a relative basis and is once again testing support. Trading since September is beginning to look more and more like a topping pattern that would be confirmed by a break of support. The ratio is below a declining 50-day moving average.

Consumer Staples

Consumer Staples are holding above support at the $700 breakout level and the rising 50-day moving average.

 

Relative to the S&P 500:

The relative trend remains to the downside as the ratio holds below the declining 50-day moving average, but we note that the last week’s low held above the low seen in early March. While very early, this group is now on watch for a possible change of trend.   

Resl Estate

Real Estate continues to grind to new highs, since breaking out, and remains well above the rising 50-day moving average. Prior highs near 260 should act as support in the near-term. On the upside, there is room for the group to reach 325.

 

Relative to the S&P 500:

On a relative basis, Real Estate continues to make the turn, trading above a now rising 50-day moving average.

Utilities

The Utilities Sector remains in a broad consolidation and has yet to retake its pre-pandemic highs. On the plus side, the group is holding above the 50-day moving average but there is still a fair amount of supply overhead.

Relative to the S&P 500:

Utilities are attempting to build a relative base as last week’s low did not exceed March’s low and the ratio has regained the 50-day moving average. While this is a step in the right direction, there is still a lot of work to do on a relative basis.  

Health Care

The Health Care Sector is holding near record levels, above the rising 50-day moving average after breaking up and out of a short-term consolidation. Last week we wrote that we would not be surprised to see a pause near the 1,450 level and thus far that view is playing out.

 

Relative to the S&P 500:

While the absolute trend is bullish, the relative trend remains to the downside. In the near-term, a base may be building but more time is needed before we can make the case that the trend is changing.

Consumer Discretionary

The Discretionary Sector is holding near-term support above the slowly rising 50-day moving average as the group trades near record levels.

Relative to the S&P 500:

The relative trend remains the biggest concern for the Consumer Discretionary Sector as the ratio carves out a series of lower highs and lower lows and the 50-day moving average continues to trend lower. 

Energy

The Energy Sector continues to consolidate around the rising 50-day moving average after failing to break above resistance at the 2019 consolidation. This is a key point that must be overcome to have confidence that the uptrend from the March lows will continue.

Relative to the S&P 500:

Energy is attempting a relative turn, but the trend remains neutral in the near-term, trading below the 50-day moving average and price-based resistance. Getting above these levels will increase the odds that outperformance is poised to continue.

Take-Aways

We are beginning to see potential for more clear leadership at the sector level on the part of Materials and Financials, as both traded to 21-day relative highs yesterday. The more aggressive areas of the market such as Discretionary and Technology continue to show signs that their relative tops may have been established. Finally, there are signs of relative life in the defensive sectors (REITs, Staples, and Utilities) that are now on our radar.
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.