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Market Internals of Key S&P 500 Sectors

Market internals is an important part of my technical studies. Why? Sustainable intermediate-term rallies are dependent on healthy market internals or expanding market breadths. There are many market internal technical indicators available. However, the three most popular indicators are the cumulative advancing issues minus declining issues indicator and the percentage of stocks trading above its 50-day ma (near-term breadth) and 200-day ma (intermediate-term breadth).


It is common practice to apply market breadth indicators to broad market indexes such as the S&P 500 Index (SPX), the NYSE Composite Index (NYA), and the NASDAQ Composite Index (COMPQ). Although it is less popular to apply market breadth indicators to the S&P 500 Sectors and other narrowed based Indexes it does, however, work in the same way. Strong sectors with intermediate-to-long term bullish uptrends also have favorable market breadth trends as well.


The top three market capitalization-weighted S&P Sectors are Technology (XLK – 25.44% mkt-cap), Healthcare (XLV – 15.72%), and Communication Services (XLC – 10.60%). Over half (51.72%) of the SPX Index (SPX) is comprised of the stocks in these three key S&P sectors. The next two largest S&P sectors by market capitalization are Financials (XLF – 10.58%) and Consumer Discretionary (XLY – 10.26%). Collectively the top five S&P sectors account for 72.60% of the overall SPX.

Enclosed below are technical reviews of the top five largest S&P Sectors by market capitalization. The emphasis in these technical studies is on market breadth internals as they pertain to current price trends.

S&P Technology Sector (XLK – 87.39)


XLK has rallied 31.67% from its 3/23/20 low. Although, this is impressive this is still considered an oversold rally. The recent rally has encountered intermediate-term resistance at 89-90 (61.8% retracement from Feb-Mar 2020 decline). The ability to break out here coupled with expanding XLK market breadth would confirm the next sustainable intermediate-term rally possibly back to retest its all-time high (102.40 - 2/19/20). However, failure to breakout warns of a consolidation toward key support near the low-to-mid 80s.


Like the Sep-Dec 2018 setback, the current advance-decline line remains in a corrective phase. This suggests further technical work is necessary for a sustainable intermediate-term XLK recovery.


It is constructive that 50% of XLK stocks are trading above its 50-day ma. This suggests near-term market breadth is broadening.


On an intermediate-term basis, only 33.8% of XLK is currently trading above its 200-day ma. Above 50-60% would confirm expanding market breadth which is necessary to a sustainable intermediate-term rally.


S&P Healthcare Sector (XLV – 98.42)


XLV has been one of the better S&P 500 sectors as it has exceeded its pivotal 61.8% retracement (92.77) and its 50-day ma (93/05) and 200-day ma (93.74). This suggests a retest of the Jan 2020 all-time high (104.57), intermediate-term. However, failure to clear its 2/24/20 gap down (101-102) and the onset of a daily bearish island reversal (4/21/20) warns of a near-term consolidation to key support at 93-95 (4/14/20 gap up and 50-day/200-day ma).


XLV market breadth has also succumbed to the Feb-Mar 2020 decline suggesting a near-term consolidation.


The % of XLV stocks trading above its 50-day ma has rallied back to 2-year highs (low-90s). However, its recent failure to breakout now warns of a near-term pullback.


% of XLV stocks trading above its 200-day ma is at 50%. However, this also implies half of XLV stocks are also trading below their respective 200-day ma.


S&P Communication Services (XLC – 47.71)


XLC is encountering medium-term resistance at 48-49 (50% retracement from Feb-Mar 2020 decline and 50-day ma). This suggests the +26% rally from Mar 2020 low is weaker than the respective XLK and XLV oversold rallies. One of the primary reasons for this divergence may be the makeup of the Communication Services sector. It is basically comprised of a mixture of high-beta growth names and lower-beta income-related names. We suspect this sector may be appropriate for long-term investors seeking a growth sector that can also provide income (dividend stream).


The violation of the Dec 2018 uptrend during Mar 2020 warns of contracting market breadth. Although the market breadth has improved it still needs further technical work before a sustainable intermediate-term recovery.


% of XLC stocks trading above its 50-day ma is 38.46%. This is an improvement from 0% (Mar 2020). The expansion signals more XLC stocks are beginning to participate in the near-term rally.

The % of XLC stocks trading above its 200-day ma (26.92%) has also rallied from the Mar 2020 low of 0%. However, it is now encountering formidable intermediate-term resistance in the mid-to-high 30s.


S&P Financial Sector (XLF – 21.52)


XLF has declined 43.80% from Feb-Mar 2020. The ensuing 34.93% rally from Mar 2020 low has been impressive. However, XLF has struggled near key medium-term resistance at 24-24.5 (3/10/20 gap down, 50-day ma, and 50% retracement from Feb-Mar 2020 decline). A bearish island reversal (4/15/20) also warns that this oversold rally will need to consolidate its recent gains before it can sustain the next intermediate-term rally. On the downside, key support is visible at 19.35-20.5 (4/6/20 gap up and 4/3/20 low).


XLF market breadth expanded briefly but is now beginning to contract again. This suggests XLF may be vulnerable for another decline.


% of XLF stocks trading above its 50-day ma encountered formidable near-term resistance near the high-20s. This warns of weak near-term market breadth.


% of XLF stocks trading above its 200-day ma has improved from Mar 2020 low (0%). However, it is still trading at 12.12% and will require additional intermediate-term work preferably above its mid-to-high 30s.


S&P Consumer Discretionary Sector (XLY – 110.41)


XLY has declined 38.42% from Feb-Mar 2020. It has since then rallied 39.17% from its Mar 2020 low. This is an impressive technical feat. However, it is now trading at overbought levels and is encountering key intermediate-term resistance at 113-115 (61.8% retracement from Feb-Mar 2020 decline and the Oct 2019 low). A bearish island reversal (4/21/20) warns of consolidation to key initial support at 101-103.


XLY advancing issues minus declining issues may have achieved a low during Mar 2020. However, this market breadth indicator still needs time to develop a technical base sufficient to launch the next intermediate-term rally.


% of XLY stocks trading above its 50-day ma is 22.22%. This is better than the 0% reading during Mar 2020 timeframe. This hints of a still narrowed market breadth from a near-term basis.


% of XLY stocks trading above its 200-day ma is only 11.11%. This is an improvement from Mar 2020 lows but still suggests continued narrowed market breadth.


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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