Key Points

    • Technology Completes its Relative Topping Pattern…
    • …While Weakness Extends Beyond the Largest Names; Equal Weight Tech Breaks as Well
    • Consumer Discretionary Moves Toward the Next Relative Support Level
    • Reflationary Groups (Materials, Financials, and Industrials) Remain Leadership 
    • Defensive Groups (REITs, Staples, and Utilities) Build Relative Bases

Key Chart

While the largest names receive much of the attention for the relative weakness in the Technology sector, we note that it appears to be more pervasive than that. The S&P 500 Equal Weight Technology Index (top panel) is in the process of breaking below the 50-day moving average and price-based support.

Relative to the S&P 500 Equal Weight Index (bottom panel), Equal Weight Technology has broken down from the consolidation that had been in place since last May.

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.

Technology

The Technology Sector is testing the 50-day moving average after pulling back from record levels which were reached in late-April. Support remains in the area of the September highs, the next logical area of interest should the moving average give way.

Relative to the S&P 500:

Last week we noted that the relative trend since September appeared to be a topping pattern. That view was confirmed with yesterday’s break below support. The ratio remains below the declining 50-day moving average, which is now likely to act as resistance to countertrend rallies. 

Consumer Discretionary

The Consumer Discretionary Sector is now testing price-based support with yesterday’s weakness. A break would bring the rising 50-day moving average into play as the next logical test.

Relative to the S&P 500:

The relative trend remains under pressure, trading to a 21-day low yesterday and below the declining 50-day moving average. Relative support comes into play near the 2019 highs / 2021 lows.

Communication Services

The Communication Services Sector remains in an absolute uptrend, above the rising 50-day moving average. We note that this group did not trade to a new high yesterday as many of the large growth names, which are holdings, remains under pressure. Near-term support moves up to the 230 – 240 zone.

Relative to the S&P 500:

The Communication Services Sector remains unable to break to new relative highs and is now undercutting the 50-day moving average after failing at resistance.

Reflationary Groups:

Materials

The S&P 500 Materials Sector traded to another record high yesterday before sellers pushed the index to close near the low of the day. Materials remain well above the rising 50-day moving average, which is in line with near-term support at the 500.

Relative to the S&P 500:

The Materials Sector continues to trend higher relative to the S&P 500 after breaking from a consolidation last week. The group also traded to a new 21-day relative high yesterday.

Financials

The Financials Sector traded to new highs on an absolute basis yesterday, continuing to trend strongly above the rising 50-day moving average. Support remains near the 580, above which, there is upside potential to 670.

Relative to the S&P 500:

On a relative basis, Financials traded to a 21-day high yesterday and have broken above near-term resistance at the March 2021 highs. The next test will be for the group to break above the 2019 consolidation zone.

Industrials

The Industrial 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 (825 – 840). On the upside, the group traded to within 3 points of the 905 level that we have been highlighting.

 

Relative to the S&P 500:

Industrials have broken above resistance on a relative basis, trading to a new 21-day high yesterday. Like the Financials, the next key zone of resistance is in area of the 2019 highs.

Energy

After holding the 50-day moving average, the Energy sector has, once again, been turned away at the resistance level that we have been highlighting. The trend remains neutral in the near-term. A break of resistance would set the stage for an attack on the highs, while a move below support would send the signal that the trend is bearish.

 

Relative to the S&P 500:

Energy is attempting a relative turn, but the trend remains neutral in the near-term, trading around the 50-day moving average but below price-based resistance.

Defensive Groups:

Consumer Staples

After holding support near the 700 level, which now houses the rising 50-day moving average, the Consumer Staples sector traded to, and closed at, record levels yesterday.

Relative to the S&P 500:

The Consumer Staples sector traded to a 21-day relative high yesterday to close above the 50-day moving average that has shifted from declining to flat. While it is too soon to say that the relative trend has changed, we can make the case that a “basing” process is under way.

Real 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 have acted as support in the near-term, as we discussed last week. 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 below its pre-pandemic highs. The group trades above the rising 50-day moving average, which could provide support in the event of a near-term pullback.

Relative to the S&P 500:

Utilities remain in the base-building process on a relative basis. The ratio closed above the 50-day moving average, which is in the process of shifting from declining to flat.   

Health Care

The Health Care Sector is holding near record levels, above the rising 50-day moving average which has moved into the support zone.

Relative to the S&P 500:

On a relative basis, Health Care is trying to make a turn from a bearish trend to bullish, holding above the 50-day moving average that has shifted from declining to flat. 

Take-Aways

Technology completes its relative topping pattern as support gives way. At the same time, weakness in the sector goes beyond the largest names as the Equal Weight Technology Index establishes its own breakdown. Economically sensitive, reflation groups (Materials, Industrials, and Financials), continue to lead while Energy remains neutral. We are closely watching the base-building process in the defensive sectors (REITs, Staples, and Utilities) for trend changes.

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.