Setting the Stage
for a Year-End Melt-Up

by | Oct 26, 2021

Key Points

  • Participation Broadens Within the Industrials Sector
  • Technology Improves, Eying a Break to New Highs
  • Discretionary Gets a Jolt from Tesla
  • Materials and Industrials Begin Move Higher, Strengthening the Cyclical Trade
  • Defensive Sectors are Moving Higher, But Not Leading

Chart in Focus

Below, we highlight improvement in the in Industrial sector and the fact that the group is on the verge of trading to new highs. Importantly, we are seeing a broadening of participation within the sector as well. The percentage of stocks trading above their 50-day moving average is breaking out, and stands at 72%. The long-term trend is also improving with the percentage of stocks above their 20-day moving averages at 78% and on the verge of a breakout. These data points support further upside for the sector.

Information Technology

The Technology sector is holding above the 50-day moving average but has not been able to break to a new high, yet. We are raising near-term support to the 2,700 level, in line with the moving average. If the equity market is going to continue to melt up into the end of the year, a breakout in the Technology sector would be a key supporting data point. 

Relative to the S&P 500

The relative trend remains trapped between support and resistance, keeping performance in the neutral camp. A break of resistance would signal that Technology is reclaiming a leadership position. Losing support would point to further underperformance. The flat 50-day moving average speaks to the neutral trend.

Consumer Discretionary

The Consumer Discretionary sector remains above the 50-day moving average and has made a strong move to new highs, largely on the back of strength in Tesla (TSLA), which accounts for ~17% of the index. Above the 1,490-breakout level, the group will likely continue higher.

Relative to the S&P 500

Last week we highlighted a new trend of outperformance taking hold, and that continues this week with the ratio moving further beyond the 50-day moving average. At the same time, we note that the moving average is moving higher as well.

Communication Services

The Communication Services sector remains below the declining 50-day moving average which is now moving lower. The 260 level remains important as break below would signal an end to the uptrend that has been in place since March 2020.

Relative to the S&P 500

The relative ratio remains below the declining 50-day moving average as it searches for support. This is a level that must hold, or the January lows are likely to be tested.

Materials

The Materials sector continues to rebound from price-based support, closing above the declining trendline, after retaking the 50-day moving average last week. We now look for a test of the June highs to signal that the uptrend is resuming. The 490 level remains key support.

Relative to the S&P 500

On a relative basis, Materials continue to show signs of stabilization, trading on price-based and moving average support. The group would shift to a leadership position by clearing the August high. We note that September’s low appears to be a false breakdown and the benefit of the doubt is shifting in favor of the bulls.

Financials

The Financials continues to move to the upside after breaking above resistance and the rising 50-day moving average. Above the 650 level, the bulls keep the ball, and the path of least resistance is higher.

Relative to the S&P 500

The relative trend is holding above resistance and the rising 50-day moving average. This dynamic keeps the odds in favor of an attack on the on June high. This view is unchanged from last week.

Industrials

The Industrial sector is holding above the 50-day moving average and is knocking on the door of a breakout, as it trades to the top of the consolidation zone. Above the 900 level the group has running room to toward 1000.

Relative to the S&P 500

The relative trend is improving, closing above the 50-day moving average. This is an early indication of a trend change. We are watching closely.

Energy

The Energy sector remains in an uptrend and somewhat extended from the 50-day moving average. Above the 410 – 420 support zone, the ball remains with the bulls.

Relative to the S&P 500

The relative trend continues to pause at resistance, while remaining above the rising 50-day moving average. The Energy bulls want to overcome the resistance zone quickly, to have confidence that leadership will continue.

Consumer Staples

The Consumer Staples sector is retaking the 50-day moving average and broken support, putting itself in position to the attack the August and September highs.

Relative to the S&P 500

The relative trend remains bearish, trading near 20-year lows, and below the declining 50-day moving average.

Real Estate

Real Estate has made an impressive rebound over the past two weeks to retake broken support and the 50-day moving average. The door is now open for an attack on the highs and likely a break to new highs. 

Relative to the S&P 500

On a relative basis, the group is fighting with the 50-day moving average, 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 inline performer.

Utilities

The Utilities Sector is moving higher from the support zone between 320 and 325 and is now in the process of breaking the 50-day moving average. Odds now favor an attack on the highs from August and September.

Relative to the S&P 500

The relative trend remains bearish, below the declining 50-day moving average.

Health Care

After holding support, the Health Care sector is testing the 50-day moving average from below. A break to the upside sets the stage for a run to the highs.

Relative to the S&P 500

On a relative basis, Health Care remains weak, despite a short-term rebound, trading below the 50-day moving average. The bearish trend is guilty until proven innocent.

Take-Aways:

The odds are beginning to point to a melt-up for the equity market into the end of the year. Technology is improving and on the verge of a breakout while Discretionary has broken out. Within the cyclical sectors, Materials and Industrials are improving to join strength on the part of Financials and Energy. Importantly, the defensive groups are moving higher on an absolute basis (participation) but are not leading on a relative basis (a sign that investors favor a risk-on stance).

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.