The Calendar Changed,
Sector Trends Have Not

by | Jan 4, 2022

Key Points

  • Defensive Sectors Check Back, but Hold Support
  • Equal Weight Staples Hint at Broader Defensive Participation
  • Cyclical Groups Are a Choppy Mess
  • Energy Tries to Rebound
  • Communication Services Are a Group to Avoid for Now

Chart in Focus

While we have been highlighting strength in defensive sectors of the market for the past few weeks, it is important to understand if that strength is a function of market cap or if there is broader participation. The Equal Weight Staples Index speaks the latter as the group traded to new highs after a strong rebound from the lows yesterday. Above 5,900, the bulls are in control.

On a relative basis, the group is making the turn higher, followed by the 50-day moving average.

Visiting the Sector Relatives

Absolute trends are in the top panel, relative trends are below.

Information Technology

The trend in the technology sectors remains bullish above the rising 50-day moving average. After breaking to new highs, the group has checked back to extremely short-term support at 3,065, presenting a compelling opportunity for those who are more on the aggressive side. Below that level, holding 2,900 keeps the bull on top.

Relative to the S&P 500

The relative trend remains bullish, though in a short-term consolidation, above price and moving average support. Odds favor continued leadership on the part of the group over the near term.

Consumer Discretionary

The Consumer Discretionary sector continues to move higher, in line with the view that we expressed last week. Above the 50-day moving average and 1,650 level, odds favor a move to new highs. Support and a price against which to manage risk come into play at 1,560.  

Relative to the S&P 500

On a relative basis, Discretionary is fighting to regain a leadership position but still has a lot of work to do. Retaking the 50-day moving average is a step in the right direction.

Communication Services

The Communication Services sector remains one if not the worst trends in the market. The series of lower highs and lower lows is the textbook definition of a downtrend, and the declining 50-day moving average confirms it. Support is near 263, then 255. We have no interest at this point.

Relative to the S&P 500

Relative to the S&P 500, the group remains in a downtrend as it tests the low from early 2021. There is a lot of work that needs to be done before this sector becomes compelling on a relative basis. Holding this support level and then retaking the 50-day moving average would be a compelling start.

Materials

Materials are holding above the 560-breakout level after regaining the rising 50-day moving average last week. This sets up a straightforward scenario. Above 560, the bulls are in control. Below that level, risk should be managed. Odds favor a continuation to the upside, however, as the group has been making higher lows of late.  

Relative to the S&P 500

On a relative basis, Materials remain neutral, battling the 50-day moving average below price-based resistance.

Financials

Financials have regained broken resistance, and the 50-day moving average as the bulls try to take control once again. The absolute trend is sloppy, and while the series of higher lows hints at an upside bias, the story is more compelling above the 670 mark, which is now in sight.

Relative to the S&P 500

The relative trend remains below the 50-day moving average and broken support. This can hardly be described as a leader.

Industrials

The Industrial sector remains trapped in the consolidation zone that has been in place since May. The index is above the 50-day moving average, which has not established a clear trend for months.

Relative to the S&P 500

The relative trend remains bearish. The ratio is trading below resistance and the declining 50-day moving average. These are levels that must be overcome before we can make the case that the bearish trend is reversing.

Energy

The Energy sector has broken above resistance and the declining 50-day moving average, increasing the odds that it will attack the former highs near 450.

Relative to the S&P 500

While the absolute trend is on the mend, the relative trend still needs time to heal. The ratio is below the declining 50-day moving average and resistance.

Consumer Staples

The bulls remain in control in the Consumer Staples sector. The only knock that we have is that the index is extended above the 50-day moving average. Short-term support is near 795 (held yesterday), while stronger support is at 760.

Relative to the S&P 500

The relative trend is holding above the 50-day moving average and support to keep the bearish to bullish transition in place.

Utilities

Utilities are holding above the breakout level after reaching new highs, which we wrote were in play in this Note last week. Near-term support is near 355. The 50-day moving average is in line with the key 345 level that we have been highlighting. Above this mark, the bulls are in control.

Relative to the S&P 500

The relative trend is holding above the 50-day moving average, which has shifted from declining to flat to rising. The trend continues to improve.

Health Care

Health Care remains bullish above the 1,600-breakout level and the rising 50-day moving average. Below 1,550, the bullish view must be questioned

Relative to the S&P 500

On a relative basis, Health Care continues to transition into a leader, odds favor a continuation of this trend in the near-term if the ratio is above the 50-day moving average and support.

Real Estate

Another “clean setup” that we highlighted last week was Real Estate. The trend is bullish for Real Estate, and the bulls will remain in control if the price is above 305, a level supported by the rising 50-day moving average.

Relative to the S&P 500

On a relative basis, the group is wrestling with the breakout level at the June highs. While the bulls retain the benefit of the doubt above the 50-day moving average, we don’t like to see false breakouts.

Take-Aways:

The defensive sectors start the year by pulling back from record highs but remain in bullish trends above key support levels. Technology continues to have a strong absolute trend, while the relative trend takes a pause. Cyclicals remain a mixed bag. However, energy is showing signs of life. The calendar may have changed, but underlying trends have not.

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.