Like produce in a supermarket, sectors rotate in and out of favor, and the first quarter saw lots of rotation. Given the movement, how do things currently stack up?
Nothing is constant except change, and the stock market is no exception. Like produce in a supermarket, areas rotate in and out of favor. Unfortunately, investors’ favorite areas are off to a slow start so far this year, with weakness concentrated in sectors that lifted the market higher in previous years. Risk-on groups such as technology, communication services, consumer discretionary are underperforming the market in 2026. However, what keeps bull markets alive is when new areas of strength emerge as others begin to falter. While growth-focused areas have stumbled out of the gate, other sectors have stepped up this year to fill the void.
For context, S&P 500 fund SPY is negative on the year, yet the majority of major sectors have gained at least 5% so far, underscoring broader market upside. Energy has led the way to the upside, with SDPR sector fund XLE gaining almost 30% YTD. Meanwhile, other old‑economy sectors such as basic materials (XLB), utilities (XLU), and industrials (XLI) are also off to strong starts, each gaining more than 10%. Dragging down markets have been the aforementioned growth areas, in addition to financials and healthcare. Offsetting these gains, the aforementioned growth sectors—along with financials and healthcare—have weighed on the market.
The culmination of these performances have resulted in significant changes in relative strength rankings. Technology fell from first to fourth, while communication services slipped to third. Meanwhile, old-economy areas flourished, with industrials rising to second and energy gaining eight ranks to claim the top spot. Utilities also advanced two positions. Lastly, financials and cyclicals lost ground, falling two and three spots, respectively.
When evaluating the strength of a group or security, NDW places primary emphasis on long‑term strength. However, short-term strength can often be an indication of where long-term strength may be headed. DALI rankings are based on a group’s long‑term RS Buy Signal tally, but short‑term strength can also be assessed by summing the RS column of Xs across a group's constituents. Doing so provides a view into which sectors might be primed for further strengthening or weakening.
Examining near‑term strength across major sectors reveals several notable deviations from their long‑term profiles. Utilities and basic materials stand out as sectors on the rise. Excluding energy, these have been the best‑performing sectors this year, despite uneven paths. Basic materials entered the year strong, rising as high as second in DALI before losing momentum as metal companies weakened, falling to sixth. However, precious metal miners have rebounded alongside the broader market, allowing basic materials to regain near-term strength. Meanwhile, utilities got off to a hot start until declining equities and rising rates in March temporarily derailed its gains. Both sectors sit slightly above average in long‑term strength, but their placement in the top‑right quadrant alongside technology, communication services, and industrials is encouraging.
By contrast, the energy sector shows the weakest near‑term relative strength among top‑half DALI sectors, despite ranking first overall. While the group put together a herculean first quarter, XLE has since fallen almost 10% from its highs, nearly entering correction territory. In fact, energy now sits farther from all‑time highs than any other major sector. Energy initially benefited from rising oil prices but has since declined alongside the commodity, with further oil weakness posing a potential headwind. Negative action saw XLE lose its near-term market relative strength last week. Investors seeking energy exposure at this stage may prefer less crude‑dependent areas such as oil‑services (IEZ) or clean energy (PBW, QCLN), especially as they display equivalent or higher levels of strength than other energy areas.
While a group with more near-term strength is more likely to rise in DALI, there’s no guarantee it will do so. Basic materials exhibited some of the most near-term strength of any group entering the first quarter and followed through up with a strong few months. However, healthcare entered the year with similar near-term strength, yet XLV is down more than 5% from the start of the year, serving as a reminder that momentum can fade if not sustained. Conversely, a lack of near‑term strength in a leading group such as energy is not a death sentence, even though it may serve as an early warning sign.
