Today we dive under the hood and discuss recent strength for communication services, our DALI leader.
Points of relative strength on the domestic front have been largely consistent over the last year or so. In fact, the top four sectors within NDW’s DALI sector rankings have been the same (give or take some flip flop between the sectors) for going on one year at this point. This remains a tailwind for momentum focused strategies as leadership trends persist, a net positive for us trend followers as we move into the last quarter of the year. While momentum’s strength won’t be the topic of today’s report, we can look underneath the hood at one of the strongest sectors to discuss how you as an advisor should approach strong sectors around all-time highs.
Communication Services maintains its position in the first place within the sector rankings. No matter what way you slice it, broad sector representative XLC trades well in overbought territory at the time of this writing- clocking in with a weekly OBOS reading of ~119%. This marks the highest level since late 2024 during which META and other top-heavy tech- tilted options led the sector (and major markets higher). While it is certainly true that a strong asset can just get more overbought, the lack of support nearby (or even old resistance to look towards) makes garnering exposure around current levels a bit more difficult. From a pure technical perspective, the low $100’s mark as the next identifiable technical landmark, but pullbacks towards the 50-day MA at $110 are perhaps more likely. Remember, trading ranges can normalize two different ways- through price or by time. Strong assets typically follow the latter, so watch more sensitive charts for identifiable support levels as they emerge.
Most of the reason XLC is trading in heavily overbought territory has been a resurgence for Google, which has quickly stormed higher to new all-time highs and gained technical favor over the last few months. GOOGL is even more heavily overbought than previously mentioned XLC, currently holding a near 150% OBOS reading at the time of this writing. This marks a point only reached by the perfect 5/5’er only a handful of times over the last few decades (2015, 2010, 2007 to name a few) and would suggest that some near-term normalization could be in store. Those looking to pick up exposure could sell cash-secured puts to lock in a price at a comfortable range below current levels on constructive pullbacks (loosely between $225-$235) while generating some income in the event that trading ranges remain elevated over a predetermined time range.
While tech-focused names in the sector garner a majority of the overall interest, that isn’t to say that other areas of the sector aren’t strong. In fact, when it comes to overall participation across the 11 broad sectors, communication services sees the 2nd highest percentage of stocks (~62%) trading on a PnF buy signal, trailing only financials. Point being, much more than just the GOOGL and META of the world are advancing. Of interest for today’s piece will be T, which has surged back to life after a near-decade long slump. The 4/5’er trades on the cusp of $30 for the first time since 2017 and has support offered just below current levels at $26. It remains a technically actionable name for those looking to pick up exposure outside of growth focused communication services, and still pays you nearly 4% in dividends.
