Is rotation back to Technology?
Several technical studies show Technology sector has emerged to take over relative strength leadership roles, at least from a near-to-medium-term perspective.
The Relative Rotation Graph (RRG) shows the relative strength and momentum of a group of stocks, sectors, and markets. A brief analysis of popular US indexes shows the Nasdaq Composite Index (COMPQ) and the Nasdaq 100 Index (NDX) have just entered the Leading Quadrant. Also, the S&P 600 Small Cap Index (SML) has quietly slipped back into the Leading Quadrant after consolidating within the Weakening Quadrant.
Another RRG study on the eleven (11) S&P sectors shows S&P Technology (XLK) and Communication Services (XLC) firmly entrenched within the Leading Quadrant, with XLK gaining additional strength and XLC weakening.
The same RRG study on the eleven (11) S&P sectors by equal weight also shows Invesco S&P 500 Equal Weight Technology (RYT), Invesco S&P 500 Equal Weight Communication Services (EWCO) situated in the Leading Quadrant, with RYT strengthening and EWCO weakening.
Interestingly, the RRG study against the Invesco S&P 500 Equal Weight (RSP) confirms two other S&P 500 Equal Weight sectors situated in the Leading Quadrant, including Invesco S&P 500 Equal Weight Consumer Discretionary (RCD), and Invesco S&P 500 Equal Weight Real Estate (XLRE).
A deeper dive into the S&P Technology sector by Technology industries show significant relative strength and momentum from Dow Jones US Semiconductors Index (DJUSSC) and Dow Jones US Software Index (DJUSSW) as they climb within the Leading Quadrant. Dow Jones US Computer Hardware Index (DJUSCR) also advances within the Improving Quadrant, threatening to move into the Leading Quadrant.
Two Technology groups within the Weakening Quadrant, including DJ US Renewable Energy Equipment Index (DWREE) and DJ US Telecommunication Equipment Index (DJUSCT), are consolidating their gains before returning to the Leading Quadrant. DJ US Electronic Equipment Index (DJUSAI) continues to weaken in the Lagging Quadrant. DJ US Computer Services Index (DJUSDV) weakens within the Lagging Quadrant.
Although most US stock market indexes (i.e., SPX, NYA, INDU, etc.) have lost considerable momentum over the past few weeks, COMPQ, NDX, and XLK continue to pick up relative strength and momentum, at least from a near-to-medium-term basis.
The S&P Technology sector (XLK) remains the largest market-cap-weighted group within SPY, accounting for 24.68% of the overall market. S&P Communication Services sector (XLC) adds another 7.65% to the SPY market-cap value. Technology and Communication Services combined for nearly a third of the overall SPY market cap, suggesting the two sectors are big enough collectively to move the overall stock market from a near-to-medium-term directional perspective.
The 1-plus year downtrend breakout during Jan 2023 in XLK hints at a trend reversal. A successful test of the 50-day ma (135.74) and 200-day ma (132.48) during the recent pullback further reaffirms a market bottom. The uptrend channel from the Oct 2022 bottom hints at a recovery toward intermediate-term resistance at 149-151 (Aug 2022 reaction high, 68.2% retracement from Dec 2021 to Oct 2022 decline, and the top of the Oct 2022 uptrend channel). Above 151 confirms an intermediate-term breakout and signals a sustainable intermediate-term recovery.
Enclosed are RRG charts on S&P market-cap sectors, S&P equal-weight sectors, Technology industries, and SCTR ranking of Technology stocks.