With Q3 wrapped up, which sectors have gained or lost strength throughout the quarter, and what groups should we overweight?
Momentum strategies tend to perform best in stable environments, and the last quarter saw leadership within domestic equities remain steady. Going into Q3, Communications, Financials, Industrials, Technology, and Utilities were the highest-rankings sectors in DALI. Three of those were among the top four best-performing sectors this quarter (looking at their SPDR funds), highlighting continued stability within sector leadership. The other sector to round out the top four this quarter was Consumer Discretionary, moving higher as the market continues to show a preference for risk-on areas. Meanwhile, Consumer Staples was the lone sector to decline last quarter, further demonstrating the movement away from risk-off areas.
Movement this quarter has resulted in notable relative strength changes, especially in the last several weeks. One of the biggest changes in DALI this quarter was the rise of Technology within our rankings, with the group gaining 42 signals—the most of any sector—to climb from 4th to 2nd place. The group has been the best performing sector in each of the last two quarters, with XLK gaining 37.8% over that span, outpacing the next closest sector by over 15%. The AI theme continues to be the dominant force in the market, bolstering the position of both Tech and Communications.
With risk-on and growth areas leading the way to the upside within equities, we’ve also seen a notable decline in defensive sectors. Staples and Utilities lost 33 and 29 signals from the end of Q2, respectively, which was easily the worst of any sectors. Staples and Healthcare now sit in the bottom two spots, with Staples dropping three spots in rank. Meanwhile, Utilities fell two spots to the 7th rank, placing all three defensive sectors in the bottom half in terms of strength.
Another theme this quarter was some improvement within Energy, with the sector gaining 31 signals over the last quarter. However, all the improvement within the sector has been driven by the strength of clean energy while the traditional areas of the sector lost strength over the last quarter. Meanwhile, Basic Materials were the third most improved group, gaining 27 signals as the sector continues to be buoyed by the strength of metal companies. Looking ahead to the rest of the year, the top sectors appear well-positioned to maintain their leadership given the recent market stability. Sectors in the top half of DALI maintain a tilt towards risk-on areas given the health of the market and remains areas to overweight within portfolios. However, changes will certainly occur through the end of the year, making it all the more important to stay up to date on the latest relative strength developments.
