Key Points

  • Chemicals Have a Positive Reaction
  • Technology Powers to New Relative Highs
  • Discretionary Needs a Break after the TSLA-Led Run
  • Materials and Industrials Gap to Records, Relative Turns to Follow?
  • Defensive Sectors Continue to Lag

Chart in Focus

In the Note below, we highlight the strength in the Materials sector. One of the industry groups driving that strength is Chemicals. The S&P 500 Chemicals Index has broken to new highs after trading in a consolidation since May. Price-based support is in the 870 – 890 zone. Above this level and the 50-day moving average, the bulls are in control as the uptrend trend from the March 2020 lows resumes.

The relative trend is in the process of a bearish-to-bullish reversal, with the ratio taking out the 50-day moving average and setting its sights on the August peak. Above that level, a new trend of outperformance has taken hold.

 

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

For the Technology sector, last week, we wrote, “the bulls are in control, and the uptrend is likely to persist.” That has largely been the case, with the group closing higher for the past five trading days and now extended above the rising 50-day moving average. While it would not be surprising to see the rate of appreciation begin to slow, the bullish trend remains in place until 2,810 is broken.

Relative to the S&P 500

The relative trend has also broken out over the past week, moving above the highs that have been in place since the start of the year to now challenge the peak from September 2020. The ratio is above the 50-day moving average. Here too, the bulls are in control.

Consumer Discretionary

The Consumer Discretionary sector is taking a breather after a powerful sprint to the upside led by TSLA. The group is well above the 50-day moving average, and we would not be shocked to see a pause or even a round of profit-taking after such a swift advance.

Relative to the S&P 500

On a relative basis, Discretionary is checking back after a break of near-term resistance. The ratio is above the rising 50-day moving average, which will need some time to catch up to the price.

Communication Services

The Communication Services sector continues to wrestle with the declining 50-day moving average above support at the 265 level. For now, the trend is a consolidation after a strong advance. We want to see a break to a new high before we can make the case that the bulls are in control.

Relative to the S&P 500

The relative ratio remains below the declining 50-day moving average as it tests support. This is a level that must hold, or the January lows are likely to be tested. For now, the odds of a hold appear suspect.

Materials

Like a hurdler, the Materials sector has jumped to a new closing high after trading in a consolidation since April. The group is above the 50-day moving average, and we now want to see the break to new highs hold to have confidence that the larger uptrend is resuming. Above 540, the benefit of the doubt is with the bulls.

Relative to the S&P 500

On a relative basis, Materials are neutral but now have an upside bias, above the 50-day moving average. Breaking above the August peak will set the stage for further outperformance.

Financials

The Financials have continued to stall after a strong move to the upside that led to a breakout in October. Price and moving average support are in the 640 – 650 range, and above these levels, the bulls are in control. 

Relative to the S&P 500

The relative trend has broken below price and moving average support, losing upside momentum. Until these levels are retaken, the group is, at best, an in-line performer.

Industrials

The Industrial sector, like the Materials, have gapped to new closing highs after trading in a consolidation since May. Above the 50-day moving average, the bulls keep the ball, and the path of least resistance is to the upside.

Relative to the S&P 500

The relative trend is sitting on support below the declining 50-day moving average. There are early signs of stabilization, but we need to see more before we can become excited here. This view is unchanged on the week.

Energy

The Energy sector continues to rest, giving the 50-day moving average time to catch up after a powerful move from the August/September lows. For now, the benefit of the doubt is with the bulls, and the uptrend is likely to resume if price is above support at the 420 level.

Relative to the S&P 500

The relative trend continues to pause below 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. This view is unchanged on the week.

Consumer Staples

The Consumer Staples have been rejected in their quest to break to new highs. The benefit of the doubt remains with the bulls if price is above the 50-day moving average and support at the 735 level. But we must ask, is this a group that deserves an allocation?

Relative to the S&P 500

The relative trend does a good job of answering the question above with a strong “No.” The trend is bearish, trading near 20-year lows.

Real Estate

After a strong rebound, the Real Estate sector continues to hit the wall at prior highs. We continue to give the benefit of the doubt to the bulls if the price is above support and the 50-day moving average, but we want to see a break to new highs soon. 

Relative to the S&P 500

On a relative basis, the group continues to dance with the 50-day moving average while holding important price-based support. This level should be watched closely. Until there is a break in either direction, we would expect the group to be an in-line performer. This view is unchanged on the week.

Utilities

Utilities remain in a broad, sloppy consolidation, keeping us completely uninterested for the time being.

Relative to the S&P 500

The relative trend remains bearish, below the declining 50-day moving average and at all-time lows.

Health Care

Health Care’s rehab process is taking longer than we would like. After a strong rebound from 1,460 support and a retake of the 50-day moving average, price has stalled below the prior highs. We want to see these highs breached before we can become more excited about a full recovery.

Relative to the S&P 500

On a relative basis, Health Care remains weak, below the declining 50-day moving average.

Take-Aways:

Eight of eleven sectors are trading at/near record highs. This lends a bullish confirmation to the uptrends that we highlighted in yesterday’s Note, supporting our view of a melt-up into the end of the year. The message from the relative trends is also bullish as the “defensive” sectors continue to lag.

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.