It is reasonable to expect investors and traders to continue to favor S&P 500 Technology (XLK), Communication Services (XLC), and Healthcare sectors (XLV) due to the uncertainties surrounding the Covid-19 pandemic as well as the structural growth potentials of these sectors. However, market breadth has also been expanding to other S&P sectors including S&P Consumer Discretionary (XLY), Industrials (XLI), and Materials (XLB). This suggests the economic recovery is sustainable and hence supports the basis for the continuation of the current 50%-plus stock market rally. In addition, the following two technical studies further reaffirm the broadening of the SPX rally but most important, this signals the emergence of new S&P 500 leadership names.
The 8/18/20 Relative Rotation Graphs (RRG) study which displays the relative strength and relative price momentum of the 11 major S&P sectors continues to suggest sector leaderships are confined to the S&P Technology and Communication Services sectors despite the fact that these two sectors have slipped into the Weakening Quadrant. Although this hint of a near-term correction the intermediate-to-longer term trends remain decisively bullish. In the past few weeks, the same RRG study also reaffirms money is strongly rotating into the S&P Consumer Discretionary and Materials sectors as evidenced by both residing within the Leading Quadrant. Another economically sensitive sector, the S&P Industrials sector, continues to improve on a relative and momentum basis as evidenced by its relative positioning within the Improving Quadrant. This technical development further hints of investors favoring Industrials, at least from a near-to-medium term perspective.
Another interesting technical study, SCTR analysis, also conducted on 8/18/20 is a stock ranking system that utilized 6 key technical indicators (i.e., % above 50-day and 200-day moving average, rate of change, RRI, and PPO) across 3 different timeframes (i.e., short-term, medium-term, and long-term) also reaffirms S&P 500 Technology and Healthcare stocks retain leadership roles as 19 Technology names and 14 Healthcare stocks dominate the top 100 SCTR list. But this has slipped slightly from the previous study performed during early-Jul 2020 where 26 Technology stocks and 22 Healthcare stocks dominated the top 100 SCTR list.
Also, note in the previous Jul 2020 SCTR study there were 11 Consumer Discretionary stocks and 9 Industrials occupying the top 100 SCTR list. Today, there are 22 Consumer Discretionary stocks, 20 Industrials names, and 5 Materials securities residing within the top 100 SCTR list. Adding the 7 Consumer Staples names residing within the top 100 list would imply over half (54%) of the stocks come directly from 4 S&P sectors namely Consumer Discretionary, Industrials, Materials, and Consumer Staples.
In summary, based on the current market environment and the supporting evidence from the above technical studies investors may need to tactically rebalance their stock positions by utilizing a barbell investment approach between Technology, Communication Services, and Health on one side of the portfolio and Consumer Discretionary, Industrials, Materials, and Consumer Staples on the other side. Attached below are some of the technically strong stocks within each of the S&P sectors.