Sitting atop the sector leaderboard in 2023 is Communication Services. Just like most of the equity market during September, Communication stocks have faltered. But they’ve dropped somewhat less than most of the market over that period, putting their year-to-date gain at 36.9%. That’s more than triple the benchmark’s 11.8% rise for the year.
From failed moves come fast moves in the opposite direction. That’s what’s happening right now in the Consumer Discretionary sector. Twice over the past 3 months, prices have briefly surpassed the August 2022 highs. Twice they’ve failed to sustain the move. This time, the sector got punished.
Information Technology spent most of 2023 in the pole position. Earlier this month, the S&P 500’s largest sector was up more than 45% year-to-date. Weakness in the back half of September has erased nearly a third of those gains and pushed Tech from the top of the leaderboard.
What do we want to own?
That’s the question we ask ourselves every day. Stocks? Bonds? Commodities? Crypto? Cash? The answer doesn’t have to be like flipping a light switch. It’s not like we want to be all in on stocks on Monday, then all in on Treasurys by Tuesday afternoon. Instead, the answer to “What do we want to own?” evolves slowly over time. Our minds gradually change as new evidence comes in, and our decisions follow those slowly-formed opinions.
Stocks have been the place to be since last fall. There’s not much argument about that. In recent weeks, though, the tide seems to have turned in favor of other asset classes. Commodities are leading the way. Check out the ratio of the Invesco DB Commodity Fund (DBC) vs. the S&P 500 below. We’ve broken the downtrend line, momentum just reached overbought territory for the first time all year, and the ratio crossed above the 200-day moving average. It’s a bit early to definitively call this the start of a new uptrend, but at the very least, this year-long downtrend has weakened considerably.
It’s tough to outperform at all when you’re mired in a protracted downtrend. The Utes are stuck on the left side of the weekly Relative Rotation Graph, alternating between the ‘Lagging’ and ‘Improving’ quadrants, but never reaching the ‘Leading’ one.
It’s a trend that’s been in place for the last 15 years.
The Health Care Sector is near the bottom of the year-to-date sector derby. The benchmark S&P 500 index has risen 16.8% before dividends, but that gain hasn’t been broadly distributed. Health Care stocks are down 2%.
The problem isn’t really that Health Care is in a downtrend. The problem is there’s no trend at all.
After being one of the weakest sectors in 2022, there are fewer stocks setting new highs in the Real Estate sector than anywhere else. Just 30% of sector constituents have set a new 6-month high more recently than setting a 6-month low. Less than 20% have broken out of a regime of new lows on a 52-week basis.
If we’re going to see the Consumer Staples bounce, it’ll need to start with an improvement in breadth.
Today, nearly three-quarters of the sector’s constituents are in long-term technical downtrends, while the other quarter remain in technical uptrends. But things are deteriorating on a short-term basis, where just 1 in 10 are in short-term technical uptrends.
The sector will need to turn things around in short order if it’s to have any hope of riding a fourth quarter rally.
It’s make-or-break time for the Industrials sector.
All year, we’ve applauded the relative strength for the group. They were the first to break out above the January 2022 highs, and even now, the Industrials are hanging above support.
The Materials sector is set to battle tough seasonality. September is its weakest month of the year, underperforming the S&P 500 index by an average of 1.4% since 1990.