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Are Emerging S&P Sectors Enough?

The broad equity markets continue to experience high volatility and erratic price swings, driven primarily by the recent weakness in mega-cap technology names even though the S&P 500 Index retains its primary intermediate-to-longer term bullish uptrends.


However, there has been a dramatic increase in price fluctuations within growth-related names, specifically technology stocks. The SPX Index is a market-cap weighted index influenced heavily by the largest S&P 500 market-cap-weighted sectors.


The recent weakness in technology (XLK - 27.56% market-cap), telecommunication services (XLC - 11.25%), and health care (XLV - 12.96%) have adversely impacted the SPX Index. The above three S&P 500 sectors, when combined, account for 52% of the total SPX market-cap weighting. Any increased fluctuation in those sectors can heavily sway the overall benchmark index leading to greater volatility.


In prior blogs and technical reports, our sector work has detected an increase in S&P sector rotations. Investors and traders are again favoring value-related and cyclical sectors at the expense of growth and technology-based sectors.


The RRG (relative rotation graph) chart visibly shows the former laggards are now emerging as market leaders. For instance, at the end of summer, Energy and Financials were solidly entrenched within the Lagging Quadrants, and Healthcare and Technology were firmly in the Leading Quadrant.


During the week ending October 11, 2021, technology, health care, and telecom services have all slipped into the Weakening and Lagging Quadrants. A prior laggard, Financial, is within striking distance from entering the Leading Quadrant. Another laggard, the Energy sector, has shown an impressive move over the past 2-weeks. XLE has quickly moved from the Lagging to the Improving Quadrant. In the past 8-weeks, XLE has also appreciated 24.4%, while SPX has declined 1.9% during the same period. Only three S&P sectors currently record gains from the late-summer period (i.e., XLE +24.4%, XLY +3.4%, and XLF +2.6%).


Equity markets have pulled back from their respective all-time highs, established during early September. Inflation concerns, gridlock in Congress, and uncertainties surrounding the timing of the Fed tapering program continue to dominate headline news and investor mindsets. Rising market volatility hints the U.S. equity markets are becoming correlated with one another. Increasing correlations also warns of challenging times ahead, at least from a near-term perspective.


Energy (2.95% SPX market-cap), financials (11.60%), and consumer discretionary (12.30%) are no longer market laggards. They are now emerging as market leaders. Despite the technical improvements, the three sectors collectively comprise only 27% of the overall market-cap weightings within the SPX Index.


Will they be enough to sustain the primary uptrends in SPX Index when XLK, XLV, and XLC consolidate their gains? And will the start of the seasonality strength period entice investors to return to the marketplace, triggering the resumption of the primary uptrend into the end of the year and early-2022?


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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