What Happened
to the Reflation Trade?

by | Dec 21, 2021

Key Points

  • Technology, REITS and Health Care Are Compelling
  • “Defensive” Sectors Are Taking Leadership Positions
  • Utilities Are on Watch for a “False Move”
  • The Reflation Trade Seems to Be Over, for Now
  • Discretionary Breaks Support

Visiting the Sector Relatives

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

Information Technology

That is a fairly clean setup in the Technology sector. Support at the 2900 level that lines up with the rising 50-day moving average was tested and held yesterday. This is a logical spot for the long-term uptrend in price to resume. At the same time, the 2,810 level provided a price point where risk can be managed.

Relative to the S&P 500

The relative trend remains bullish, above price and moving average support.

Consumer Discretionary

The Consumer Discretionary sector has lost bullish positioning in the near term with a move below the 50-day moving average and price support. The door is now open to a further downside to the summer consolidation zone.

Relative to the S&P 500

On a relative basis, Discretionary has lost its leadership position and must now work to regain broken support levels and the 50-day moving average before it becomes compelling.

Communication Services

The Communication Services sector is doing an admiral job of fighting off its back, holding near price support as it trades below the declining 50-day moving average. However, the near-term trend of lower highs and lower lows can’t be ignored; we prefer to see the moving average regained before becoming excited about the group.

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. A lot of work that needs to be done before this sector becomes compelling on a relative basis.

Materials

Materials have gapped below the 50-day moving average just as they were on the verge of reclaiming the breakout level. Until there is a sustained move above 560, the group is in a neutral position at best. 

Relative to the S&P 500

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

Financials

Financials remain below the 50-day moving average and resistance at the breakout level that failed to hold as support. At the same time, the series of higher lows that we called out last week is at risk of being broken. The burden of proof is on the bulls to reestablish the uptrend.

Relative to the S&P 500

The relative trend remains below the 50-day moving average as it tests important support. A breakdown points to a new trend of underperformance.

Industrials

The Industrial sector remains trapped in the consolidation zone that has been in place since May. The index is below the 50-day moving average, which has not been able to establish 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 is losing the battle to regain the breakout level in the near term. The group is below the 50-day moving average, which is beginning to curl to the downside. The onus is on the bulls to reverse the tide quickly.

Relative to the S&P 500

The relative trend remains below resistance and the 50-day moving average. For now, the trend is neutral, but the bias is to the downside.

Consumer Staples

It may be a case of “too far, too fast” for the Consumer Staples, but we must respect the breakout if the group is above the 760 level.

Relative to the S&P 500

The relative trend is continuing to move higher after retaking the 50-day moving average to establish a higher high for the first time since March.

Real Estate

The Real Estate sector also has a clean setup with near-term support acting as a reference point for putting capital to work, while the lower support level proved a point against which to manage risk. The rising 50-day moving average speaks to the bullish trend. 

Relative to the S&P 500

On a relative basis, the group has taken out the June highs, which we pointed out as “in play” in these pages last week. The group is leadership.

Utilities

Utilities have pulled back into the consolidation zone after the breakout failed to hold. Above 345 and the moving average, the benefit of the doubt stays with the bulls, but 355 must be regained quickly. 

Relative to the S&P 500

The relative trend continues to turn to the upside and remains above the 50-day moving average. More work that needs to be done, but the trend is improving in the near term.

Health Care

Health Care provides a clean set up after breaking to new and pulling back to test the breakout level. The trend is bullish above 1,600, and risk can be managed near support at 1,550, which will soon line up with the rising 50-day moving average.

Relative to the S&P 500

On a relative basis, Health Care has spiked above the 50-day moving average, which is now turning higher. The trend is reversing.

Take-Aways:

While the news is full of stories about inflation and how much more expensive the holidays will be this year, the sectors of the S&P 500 that should do well in an inflation regime appear to have peaked for now. In the interim, defensive sectors have scored important breakouts and are shifting to a leadership position. Technology offers a compelling entry here and now…as do Real Estate and Health Care.

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.