SPX and Leadership Sectors
S&P 500 Index (SPX)
The -35.41% bear decline from 2/19/20-3/23/20 remains one of the fastest and deepest bears in history. The death cross sell signal (3/27/20) and the rolling over (downtrends) of the 50-day and 200-day ma warns of change in the primary trend from an uptrend to a downtrend. Nonetheless, the selling exhaustion to the 3/23/20 low (2,191.86) may have created a potential bottom. Unless this is a V-type bottom and hence a V-type recovery SPX will need time to rebuild the technical base to confirm a major bottom and to sustain a longer-lasting recovery. The gap up (3/24/20), positive outside week (3/23/20), a gap up island reversal (4/6/20), and most recently the technical breakout above its 38.2% retracement (38.2%) now signals the next sustainable rally to 50% retracement from Feb-Mar 2020 decline (2,792.69), and above this to 2,934.5-3,919 (61.8% retracement, convergence of 2019 trendlines, 50-day and 200-day ma, and cluster of heavy volume). Above 2,900-3,000 is technically important as this signals an intermediate-term recovery in SPX possibly to a retest of its all-time high (3,393.52). Key initial support rises to 2,538.18-2,547.57 (4/6/20 gap up), 2,448.49 (4/1/20 low), 2,301-2,344 (3/24/20 gap) and 2,191.86 (3/23/20).
As we have alluded in a prior March 31, 2020 Blog (Recap of the 1st Quarter) one of the keys to confirming a major market bottom and most important, a sustainable and longer-lasting SPX recovery is the emergence of leaderships sector. This will entice long-term investors or strong hands to return to the marketplace with conviction. Only then will the market return to its primary uptrend and record new all-time highs. Enclosed below are technical reviews of the current leading S&P 500 sectors, at least based on relative strength and relative price momentum readings. It is also important to note that long-term investors continue to favor secular/structural growth sectors and names.
S&P 500 Technology ETF (XLK)
XLK is the relative strength SPX outperformer as evidenced by its -33.50% vs SPX (-35.41%) from Feb-Mar 2020 decline. It has also outperformed SPX on the recent 3/23/20 to present oversold rally (+22.91% vs +21.53%). The gap up on 3/24/20, coupled with an island reversal (4/6/20) as well as today’s 4/6/20 breakout above its 38.2% retracement (81.20) from Feb-Mar 2020 is technically significant. This signals the next near-term rally toward 84.54-85.25 (200-day ma and 50% retracement), and above this to 88.67-89.30 or the 50-day ma and the pivotal 61.8% retracement. The ability to clear above its 61.8% retracement zone confirms the start of a sustainable intermediate-term rally possibly to retest its Feb 2020 all-time high (102.40). This is an important S&P 500 sector both a market cap perspective but more so from a sustainable structural leadership basis. The leaders during a bear decline suggest long-term investors believe that this area. On the downside, initial support rises to 78.83-80 (gap up island reversal on 4/6/20), and below this to 75.96 (4/2/20 low), 72.22-73.46 (3/24/20 gap up), and then 68.10 (3/23/20 low).
S&P 500 Healthcare ETF (XLV)
XLV is another relative strength leader outperforming its peers and SPX during Feb to Mar 2020 bear decline (-29.67% vs -35.41%) and during the recent 3/23/20-present oversold rally (+24.19% vs +21.53%). XLV is nearing key intermediate-term resistance at 92.72-94.13 or the 61.8% retracement from Jan-Mar decline and the 50-day ma as well as the 200-day ma. A breakout here reaffirms its leadership role, possibly reaffirming its secular/structural leadership for many years to come. Initial support moves up to 88.12-89.14 (4/6/20 gap up), 83.93 (4/2/20 low), and then 73.54 (3/23/20 low).
S&P 500 Consumer Staples ETF (XLP)
XLP is a classic defensive sector. This sector has historically outperformed S&P 500 peers during periods of market turmoil (i.e., financial market crisis, credit uncertainties and recessions). It is of no surprise that during the recent Feb-Mar 2020 bear decline, XLP has outperformed SPX falling -26.07% vs SPX declining -35.51%. However, as can be expected with defensive, low-beta sectors it has also lagged during the recent 3/23/20-present rally gaining 20.45% vs 21.53% for SPX. This suggests investors and traders remain uncertain about the sustainability of the 3/23/20 bottom. XLP is approaching pivotal intermediate-term resistance at 58.05-59.88 (61.8% retracement from Feb-Mar 2020 decline and 50-day and 200-day ma). The ability to convincingly breakout may not be technically constructive as this hint of continued market concerns. Initial support moves up to 55.52-55.92 (4/6/20 gap up), and below this to 52.68 (4/2/20 low), 50.49 (3/16/20 low), and then to 47.66 (3/23/20 low).
S&P 500 Communication Services ETF (XLC)
The new XLC is now comprised of the combination of defensive and higher beta securities including the traditional telecom companies and the newer non-traditional communication names. This may be one of the reasons for the recent mixed returns. That is, XLC has outperformed SPX during its Feb-Mar 2020 decline (-33.02% vs -35.41%) but has underperformed during its recent 3/18/20 and 3/23/20 rally to present rally (+16.49% vs +21.53%). Although XLC is one of the S&P 500 sectors that reside within the Leading Quadrant (based on current RRG analysis) XLC continues to lag SPX on the price basis as it is still trading far below its 38.2% retracement (45.84) from Feb-Mar 2020 decline. This is in sharp contrast to SPX and others S&P 500 sectors that have managed to surpass key initial resistances. A convincing move above 45.84 is needed to confirm an XLC breakout. This will signal the start of a technical recovery toward 48.08 (50% retracement), and above this to 49.71-50.63 (50-day, 200-day ma and 61.8% retracement). Initial support is visible along 43.11-43.48 (4/6/20 gap up), 41.17-41.59 (3/24/20 gap up and 4/3/20 low), and then 39.57 (3/18/20 low).
S&P 500 Utilities ETF (XLU)
XLU is another classic defensive and income producing S&P 500 sectors. However, the fluctuations and dislocations in US interest rates may have become influential to the recent performances. XLU has underperformed SPX during the Feb-Mar 2020 decline (-38.30% vs -35.41). However, XLU has dramatically outperformed SPX from its 3/23/20 low gaining 28.43% vs 21.53%. Next key resistance is 56.92-58.09 (50% retracement from Feb-Mar 2020 decline, bottom of 3/12/20 gap down and 3/30/20 high). Above this suggests a recovery to 60.10-62.10 (61.8% retracement and 50-day and 200-day ma). Strong performances in this sector may signal lower US interest rates as income investors turn to this income producing group. Initial support moves up to 50.42-51.08 (3/16/20 and 4/1/20 lows), and below this to 43.44 (3/23/20 low).