Why Aren’t Defensive Groups
Showing Stronger Leadership?

by | Sep 21, 2021

Key Points

  • Airlines Hold Support, Can They Help the Transports Fly?
  • Industrials Test and Hold Relative Support
  • Materials Break Support on a Relative Basis
  • Defensive Sectors Stabilize vs. the S&P 500, but are not Breaking Higher
  • Health Care Continues to Show Leadership Potential

Chart in Focus

Within the Industrial sector, Transports have been a key weak point and that includes the Airlines. However, there are subtle signs of a potential shift that warrants attention. The S&P 500 Airlines Index is beginning to base after holding support. The group is now testing the 50-day moving average from below, and a break would be a bullish development.

Looking at the Airlines relative to the broader Industrials sector, the ratio has also held support. However, in this case, the Airlines are breaking above the 50-day moving average. Further strength here would be a bullish signal for the group and the overall market, especially if the rest of the Transports follow suit.

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.

Information Technology

The Technology sector undercut the rising 50-day moving average and the near-term support level at 2,700 as equities have come under pressure of late. We now turn our attention to the 2,600 level which, if broken, would signal that the uptrend is reversing. A fast reversal from here, that retakes the moving average would be a welcome development for Technology bulls.

Relative to the S&P 500

The relative trend has stalled just below resistance and is testing the 50-day moving average from above. The resistance level is the last key test before an attack on the September 2020 highs can unfold.

Consumer Discretionary

The Consumer Discretionary closed below the 50-day moving average but remains within the range that has marked trading since March. Price-based support near 1,400 continues to be the key level for the consolidation. Resistance is near 1,490. Between these two price points, there is not much of a view that can be gleaned.

Relative to the S&P 500

On a relative basis, the trend remains bearish. After a break above the declining 50-day moving average, the ratio is beginning to turn lower from trend resistance that has been place since last October.

Communication Services

The Communication Services sector closed below the 50-day moving average and near-term support yesterday as well. Despite these short-term negatives, the bigger trend remains to the upside until 260 is lost.

Relative to the S&P 500

The relative ratio remains in an uptrend as well, testing the rising trendline from the early 2021 lows. The 50-day moving average continues to grind higher and has not been breached with recent weakness.

Materials

The Materials sector failed to hold the 50-day moving average and is now testing support at the bottom of the consolidation zone. It is encouraging to see that the group rebounded late in the day yesterday, to close near the top of the range, after testing support.

Relative to the S&P 500

On a relative basis, however, Materials have broken below support, signaling increased odds of continued underperformance.

Financials

The Financials have broken below the 50-day moving average and are now stuck in the middle of the range that has been in place since April. Price-based support remains near the 580 level, while resistance is near the recent highs at 650.  

Relative to the S&P 500

The relative trend is neutral in the near-term as the group continues to test the 50-day moving average. The ratio is above key support but a move above the interim August highs remains elusive.

Industrials

As with the Materials sector, the Industrials fell to their key price-based support level before staging a rebound to close near the top of the day’s range. Despite being below the 50-day moving average, the group remans in a consolidation.

Relative to the S&P 500

Unlike the Materials, the relative trend for the Industrials sector has held support. The trend does remain to the downside, below the declining 50-day moving average. However, if a rebound were going to take hold, this would be a logical place for one to begin.

Energy

The Energy sector continues to hold price-based support but is having a hard time with the declining 50-day moving average. Holding support and retaking the moving average would go a long way in repairing the recent damage that has been done to the group. At the same time, a rebound would signal that the late August move lower was a false breakdown.

Relative to the S&P 500

On a relative basis, the ratio is also having trouble with the declining 50-day moving average as it trades below resistance. Until these levels are broken to the upside, the group will likely remain an underperformer.

Consumer Staples

The Consumer Staples sector has lost the 50-day moving average and the 740-support level. A failure to quickly regain these levels would be a signal that the uptrend is near its conclusion.

Relative to the S&P 500

The relative trend is trying to stabilize, something that we would expect to see from a defensive group while equities are under pressure. The ratio remains near the 2001 lows but is, once again, dancing with the 50-day moving average. Should the ratio continue higher from current levels, it would be a caution sign for equities.

Real Estate

Real Estate has pulled back below the 50-day moving average to test price-based support near 290. This keeps the uptrend that began with the March breakout in place.

Relative to the S&P 500

On a relative basis, the group is beginning to rebound from the 50-day moving average but has yet to overcome resistance.

Utilities

The Utilities Sector has broken below price-based support and the 50-day moving average. The aggressive move to the downside means that the recent highs were likely a false breakout and reestablishes the 345 level as resistance.

Relative to the S&P 500

The relative trend is also below the 50-day moving average but has stabilized recently. Equity bulls want to see the market rebound from the recent selling pressure while this ratio resumes its bearish trend.

Health Care

The Health Care sector closed below the 50-day moving average but remains in the uptrend that began with the November low. Price-based support is at the 1,470 level, above which the trend remains to the upside.

Relative to the S&P 500

On a relative basis, Health Care continues to oscillate around the 50-day moving average and resistance as it builds a base.

Take-Aways:

Despite the recent pressure in the equity markets, there is not much that has changed with the relative trends at the sector level. Defensive groups have shown some signs of relative stabilization, as we would expect in times of stress, but they have not made meaningful moves to the upside. This is an interesting development. We would expect to see stronger defensive leadership if risks in the market were truly elevated. Within the cyclical groups, Industrials are the most interesting as they test/hold relative support. Materials, on the other hand, have seen their key relative support level give way.

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.