Key Points
Equities started the week by not doing much of anything, with the three major averages trading mostly flat on low volume. It appears that investors are waiting for a catalyst in the form of first quarter earnings season, which kicks off this week. Tomorrow morning we will hear from JP Morgan and Wells Fargo ahead of the opening bell.
With that in mind, we look at the S&P 1500 Bank Index which recently broke above an important resistance level at the 2018 and 2020 highs. The index is now in a short-term consolidation and earnings reports are the potential catalyst that can break the group higher or lower. Momentum is “with the breakout” as the RSI recently became overbought and is in a bullish regime. On a relative basis, banks are trading above near-term support after lagging for more than two years.
Visiting the Sector Relatives
All the charts below will look at the individual sector indexes relative to the S&P 500 to get a sense of leaders, laggards, and shifts in relative trends. The bottom panel of the charts show the 14-day RSI of the relative ratios.
Materials
The S&P 500 Materials Sector continues in a choppy uptrend from the 2020 lows relative to the S&P 500. The RSI is in the middle of the range and has not become oversold since March 2020. There is resistance just overhead that must be broken for the bullish trend to remain in place. The 200-day moving average is rising and has been support to pullbacks for the group.
Communication Services
On a relative basis the Communication Services Sector remains volatile, just below the recent highs, but is holding above the rising 200-day moving average. The RSI is in the middle of the range and, we note that, it did not become overbought while the ratio traded higher in March. The bigger trend is to the upside, but the path higher has not been smooth.
Financials
The Financials Sector remains in a relative consolidation in the support zone. The consolidation follows an overbought RSI reading but we note that this indicator remains in bullish ranges. The Financials are trading above the rising 200-day moving average, which is moving higher. As mentioned above, the sector will be in focus this week with the large banks kicking off earnings season.
Industrials
The Industrials are moving higher in a choppy trend above the rising 200-day moving average which acted as support to the most recent pullback for the ratio. The RSI is holding within a bullish regime after becoming overbought, signaling that momentum for the ratio remains to the upside. Breaking above resistance will the next step in keeping the bullish trend in play.
Technology
Last week we highlighted the importance of the Technology sector regaining the 200-day moving average relative to the S&P 500. Over the course of the past five trading days, it did just that. This was the first step that we wanted to see to increase the odds that the current consolidation would resolve to the upside. The next step would be to see stronger momentum in the form of the RSI continuing to move higher and become overbought.
Consumer Staples
The defensive Consumer Staples sector remains in a pronounced relative downtrend, below the declining 200-day moving average and resistance. The RSI failed to become overbought during a recent rally attempt, signaling that momentum remains to the downside for now.
Real Estate
Like the Staples, Real Estate is a defensive sector of the S&P 500 that is in a relative downtrend, below the declining 200-day moving average and resistance. Unlike the Staples, there is a potential shift in momentum as the RSI of the ratio has recently found support at the 40 level. While a confirmation from price is always needed, we are watching to see if waning downside momentum is a sign of a possible change of trend.
Utilities
The Utilities are also a “defensive” sector of the market and they are in a steady downtrend below the 200-day moving average and resistance. While not visible on the chart, we note that the recent relative lows were the lowest that we have seen since 1989. The RSI confirms the bearish price momentum as recent highs have not been able to break above the 60 mark.
Health Care
The Health Care sector broke to another new relative low over the course of the past week as it continues to trade below the declining moving average and price-based resistance. The move lower is confirmed by momentum with the RSI trading near-oversold levels and holding within a bearish regime.
Consumer Discretionary
The Discretionary Sector continues to rebound from support at the 2018 / 2019 consolidation and we now look for the ratio to regain the 200-day moving average to signal that the relative advance is likely to continue. After becoming oversold on a recent pullback, the RSI is moving higher. Breaking above the 60 level and then becoming overbought would send a bullish momentum signal for the group.
Energy
The Energy sector continues to build a base after a long relative downtrend that dates to 2008. In the near-term, the ratio is in a bit of a “no-man’s land” as it trades above the 200-day moving average (which has shifted from declining to flat) and price-based resistance. After registering its highest reading of the past five years, the RSI has pulled back and broken an uptrend line from the March 2020 lows. After a strong rebound from the lows, the ratio appears to be taking a breather. A break above resistance would signal that the next leg of the uptrend is beginning.
Take-Aways
Despite record highs for the S&P 500 last week, there is not a clear-cut leader at the sector level. The market can best be characterized by a series of mini rotations that serve to keep the broader averages afloat but have made sector leadership hard to discern. The positive for equity bulls is that the three defensive groups remain mired in downtrends. Away from the defensives, there is one major question that needs clarity.
Will leadership come from the cyclical groups (Energy, Financials, Industrials & Materials) or from the secular growers (Technology, Discretionary and parts of the Health Care sector)?
The jury is still out on this one.