Like produce in a supermarket, sectors rotate in and out of favor, and markets have undergone lots of rotation recently. Given the movement, where do sectors currently stack up?
Nothing is constant except change, and the stock market is no different. Like produce in the supermarket, areas rotate in and out of favor. What keeps bull markets alive is when new areas of strength arise as others begin to falter. While the second quarter was productive, it also brought about several changes in sector strength. With that in mind, what sector shifts occurred last quarter, and how did they impact DALI’s sector rankings?
The second quarter was overwhelmingly positive for domestic equities, but the eleven major sectors saw a wide dispersion in performance. Upside within the market was led by technology stocks, with the SPDR Select Sector Technology fund gaining a whopping 36.4%—24.1% more than the next closest sector. In fact, technology was the lone sector to outperform SPY, underscoring the concentration of leadership in recent months. Industrials was close behind the market with an 12.3% gain and has been a staple of relative strength over the last year. Real Estate also put together surprisingly strong quarter, with XLRE rising 11.8%. Rounding out the top five in Q2 were Healthcare and Financials, as XLV and XLF gained around 9% to 10%. Conversely, Energy and Communication Services were the only two sectors to decline in Q2, with XLE and XLC falling 11.5% and 4%, respectively. The energy sector pulled back as oil prices plummeted back to their previous range, while communications was dragged down by media and entertainment companies like Netflix (NFLX).
Performances from the major sectors caused several notable changes in our DALI rankings, especially at the top. Energy entered the quarter at the top of DALI but has since plummeted to seventh. Communication Services saw a similarly sharp decline, dropping from third to sixth. Basic Materials was the only other sector to fall within rankings as it slid from sixth to eighth. Technology returned to the first spot with its herculean performance in Q2, while Industrials held steady at second. Healthcare and Financials both moved into the top four despite entering April in the bottom half of the rankings, marking a notable turnaround for both sectors.
When evaluating the strength of a group or security, NDW primarily emphasizes long-term strength. However, short-term strength can often indicate where strength might be headed. DALI’s rankings are based on the long-term RS buy signal tally of a group, but we can also look at the short-term strength of groups by counting the total RS column of Xs for all of their representatives. Doing so provides a view into which sectors might be primed for further strengthening or weakening.
Looking at near-term strength across major sectors, there are several standouts deviating from their long-term trends. The recent pullback with Technology has left the group with below average levels of near-term relative strength, so investors should keep an eye out for potential further deterioration. That said, its long-term strength remains extremely solid for now. Industrials, Healthcare, and Financials are the only three sectors with above average levels of both near- and long-term relative strength, which is a positive sign for these groups going into Q3. Meanwhile, the Energy, Communications, and Basic Materials sectors rank at the bottom in terms of near-term strength, so these groups could continue to lose long-term steam.
Deterioration within Communications has been particularly notable this quarter, and the chart for XLC has not provided much hope either. The fund recently moved to its second consecutive sell signal, leaving it without traditional support until nearly 20% lower at $88. At the end of May, it moved into a column of Xs versus the S&P 500 Equal Weight Index (SPXEWI) and now has a poor fund score of only 2.28—down 2.98 points from its January highs. Given the shift in recent months, it is no longer a group to overweight, and investors should look for select stocks rather than broader sector exposure. That said, XLC is at the bottom of its ten week trading band, and previous resistance from $104 to $100 could serve as future support. As a result, the group could stabilize or experience a modest bounce over the next few weeks as it consolidates and normalizes its near-term trend.
