Key Points

    • Chemicals are a Key Driver of the Material’s Strength
    • “Reflation” Sectors Continue to Lead the Pack
    • Energy on the Verge of a Key Breakout
    • Defensive Sectors are in the Base-Building Process, Watch Closely
    • Technology & Discretionary Continue to Lag

Chart in Focus

While the metals have been getting much of the attention in the Materials sector of late, we note that the Chemicals have been a leader in the space as well. The S&P 500 Chemicals Index is in a steady uptrend, above the rising 50-day moving average. The group is just below record highs and has near-term support in the 800 – 825 range.

On a relative basis, Chemicals are in the process of breaking out, setting the stage for a continuation of the trend of outperformance.

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.

Technology

The Technology sector has broken below the 50-day moving average as the weakness that we have been highlighting persists. The door is now open for a test of support in the 2,200 – 2,250 range. Should that level give way, the odds are high that the lows from September and November 2020 will be reached.

Relative to the S&P 500:

On a relative basis, Technology is below the declining 50-day moving average and broken support. The trend of lower highs and lower lows remains in place as the group has completed the transition from leader to laggard.

Consumer Discretionary

The Consumer Discretionary sector has broken below price-based support and the 50-day moving average as weakness in its largest stocks persists. The next logical support zone is in the area of the September and October highs, near 1,300.

Relative to the S&P 500:

Consumer Discretionary remains in a downtrend on a relative basis, below the declining 50-day moving average, and is now testing support from the July 2019 high. Holding this level would be an important first step in changing the bearish trend that is currently in place.

Communication Services

The trend for the Communication Services sector remains to the upside, as the group tests and holds the rising 50-day moving average. A break of the moving average would set the stage for a test of support near the 230 level. New highs would keep the structure of the bullish trend in place.

Relative to the S&P 500:

Despite the rising price trend, Communication Services has been unable to break to new highs on a relative basis. The ratio is below the declining 50-day moving average.

Materials

The Materials sector remains one of the strongest trends in the market currently, trading well above the rising 50-day moving average. The group traded to a new closing high yesterday.

Relative to the S&P 500:

Materials continue to lead the broader market, trading to a fresh 21-day relative high yesterday.

Financials

The Financials sector also remains in an absolute uptrend, above price-based support and the rising 50-day moving average. It is interesting to note that the group has maintained its uptrend even though interest rates have stalled in their own uptrend.

Relative to the S&P 500:

Financials traded to a new 21-day relative high yesterday. The group is above the 50-day moving average and price-based support, keeping the door open to an attack on the relative highs that were in place prior to the pandemic.

Industrials

The uptrend persists for the Industrial sector, which is trading above the rising 50-day moving average and close to record levels. Support is in the 830 – 840 range.

 

Relative to the S&P 500:

On a relative basis, the Industrials are holding support as the ratio trades above the rising 50-day moving average. Above this support zone, the group is likely to test the pre-pandemic relative highs.

Energy

The Energy sector is testing resistance as it trades in a consolidation that has been in place since March. A break of the 415 level would set the stage for a run to 470. On the downside, support is clearly defined in the 340 – 350 zone. The group is above the rising 50-day moving average.

 

Relative to the S&P 500:

Energy did trade at a 21-day relative high yesterday and is holding above the 50-day moving average. The next test will be for the group to trade above the June 2020 relative high to complete the bearish to bullish transition.

Consumer Staples

The Consumer Staples sector remains above price-based support and the rising 50-day moving average. The group is trading just below record highs after a breakout in March of this year.

Relative to the S&P 500:

Staples are potentially in the process of shifting from a bearish to bullish relative trend. The shift would be completed with a break above the January and March highs. The 50-day moving average has shifted from declining to flat. A shift to outperformance on the part of this defensive sector is a development which should be on the minds of all bullish investors.

Real Estate

The Real Estate sector is fighting to the hold the breakout level as it trades above the rising 50-day moving average. Failing to hold support and breaking below the moving average would label the recent highs as a false breakout and would likely lead to a swift move to the downside.

 

Relative to the S&P 500:

The relative trend in Real Estate continues to slowly shift to the upside. The ratio is above the rising 50-day moving average, signaling early outperformance by this defensive group.

Utilities

Utilities remain in a consolidation, with support at the rising 50-day moving average and resistance at the highs that were reached in November 2020 and April 2021. A break above this first resistance level would likely lead to a test of the pre-pandemic highs.

Relative to the S&P 500:

Utilities are bouncing along the bottom on a relative basis. The ratio has been oscillating around the flat 50-day moving average and continues to build a base.

Health Care

Health Care is consolidating recent gains, holding above the breakout level and the rising 50-day moving average. This keeps the structure of the uptrend in place.

Relative to the S&P 500:

Health Care could be in the early stages of a bearish to bullish reversal on a relative basis. Holding above the 50-day moving average is a good start, but more time is needed in this process.

Take-Aways

There is not much that has changed since last week from a trend perspective. The “reflation” groups (Materials, Energy, Financials, and Industrials) remain the best performers. The former leaders (Technology, Discretionary, and Communication Services) are transitioning to laggards. Perhaps the most interesting dynamic is the fact that defensive groups (Staples, Real Estate, and Utilities) are attempting to shift from bearish to bullish relative trends. These transitions should be a concern for bullish equity investors.

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.