The extreme price rallies as well as the sharp momentum and volatility moves are often characteristics of intermediate-term bottoms (3/23/20). Now everyone wants to know – how sustainable are these rallies?
The current market environment is challenging because of the uncertainties of the coronavirus pandemic. Since the cause of the bear market decline is the direct result of an exogenous event (medical crisis) no one knows when the pandemic will be resolved and how the US and global economy will recover.
Nonetheless, US stocks are back in rally mode and key major US indexes (COMPQ and NDX), as well as a few large-cap S&P 500 stocks, have recorded new all-time highs. It is the strongest such gains since the 1930s. But again, the pertinent question remains are these rallies sustainable?
The world is changing and moving fast. The coronavirus has accelerated several industries such as Technology, Communication Services, Healthcare, and select Consumer Discretionary industries. We believe these are the structural growth areas that will sustain higher prices, over time. However, the pandemic has created a lot of uncertainties, and certain markets, sectors, industries, and companies will struggle and possibly will never be the same as before the pandemic. While others will need time to sort through this and begin to adjust to the new environment.
Enclosed below are technical reviews of four lagging S&P 500 sectors including Energy (XLE), Financial (XLF), Industrials (XLI), and Materials (XLB).
S&P 500 Energy (XLE – 42.88)
The sharp 109.47% oversold rally from the 3/18/20 low (22.38) has encountered formidable intermediate-term resistance at 45.60-48.25 (61.8% retracement from the Jan-Mar 2020 decline and the 200-day ma (48.25). The failure to break out here warns of consolidation to initial support at 40-41 (Mar 2020 uptrend and early-Jun 2020 gap-up breakout), and below this to 36.5-38 (50-day ma and late-May 2020 low). Despite the strong XLE price gains over the past 2-plus months, the relative strength is still trading below its early-Jan 2020 downtrend channel breakdown. This suggests a lack of sustained relative strength against SPX peers. MACD price momentum is now testing crucial resistance at the 2016/2018 highs.
S&P 500 Financial (XLF – 25.19)
The 54.40% rally from 3/23/20 low (17.49) has stalled near key intermediate-term resistance at 26-27 (61.8% retracement from Feb-Mar 2020 decline and 200-day ma). This failure to clear important resistance warns of a pullback toward initial support at 23.5-24.5 (6/3/20 gap-up and 5/27/20 gap-up breakout), and below this to secondary support at 21.5-22.75 (5/26/20 gap-up, 50-day ma and Mar 2020 uptrend). XLF relative strength trend remains below its early-Mar 2020 breakdown. This suggests relative strength remains weak. MACD price momentum has also broken out above its 2018/2019 uptrend suggesting strong price momentum. The SCTR score of 15.9 is low technical reading. This suggests the recent Mar-Jun 2020 XLF rally is not backed by strong technical credentials.
S&P 500 Industrial (XLI – 72.61)
S&P Industrials (XLI) - The 60.41% rally from 3/23/20 low (47.71) was a strong rally as it has surpassed above its 61.8% retracement (70.65) from Feb-Mar 2020 decline and its 200-day ma (73.5). However, it appears the XLI rally has created an oversold condition, and the failure to clear above the extension of the Nov 2019 breakout near 77-78 now hints of a consolidation. Initial support is 69-71 (6/2/20 breakout), and below this to 65-66 (5/26/20 breakout), and then 62-64 (Mar 2020 uptrend and 50-day ma). The relative strength trend rally is now fading at the convergence of the bottom of the 2018/2019 downtrends. MACD has rallied strongly and has now broken out above its key resistance. SCTR traded to the low-70s and is now consolidating to 45. This hints of improving technical credentials.
S&P 500 Materials (XLB – 58.51)
Materials (XLB) - This sector has rallied 61.03% and is approaching key neckline resistance at 61.22-61.53. A convincing move above 61.22 confirms a 2-plus year head and shoulders bottom breakout and suggests +24.09 points to 85.62, over time. However, the strong rally has created an overbought condition, and consolidation is needed to alleviate this condition. Key near-term support rises to 54-55.5 (200-day ma), and below this to 51-52 (50-day ma). Relative strength has improved. However, a convincing surge above the extension of its triangle breakdown would confirm the start of sustainable relative strength. SCTR score of 79.1 signals strong technical credentials. However, the recent failure to breakout above the high-80s to low-90s warns of a consolidation.