The Deep Dive

Communication Services

Good morning,

This week we’re taking a closer look at communication services. I’ve been sharing the chart below for the past few weeks in The Monday Morning Playbook, but it was really the bottom-up work I do for the Thursday equity report where communication services started to catch my eye.

Sure enough, communication services jumped out of the 2023 gate last week, its 5% gain the best of any sector. Does 2022’s worst-performing sector have a chance to be this year’s best? Let’s dive in and find out!

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Top-down look

Inverse head and shoulders pattern trying to play out

XLC is getting closer and closer to completing an inverse head and shoulders bottoming pattern. A breakout through the neckline at $52 would target $59/share.

Worst performing sector last year

On a price-return basis, communication services lost 38.2% in 2022, the worst of any of the 11 S&P 500 sectors.

Signs of life in a bad relative chart

Obviously, when you’re the worst performer in 2022, you aren’t going to have a great relative chart. So of course, the XLC:SPY ratio is far from an uptrend. But there are notable signs of life. The ratio has recently broken through its 10-week moving average, which acted as resistance all the way down, and the weekly MACD has been turning up higher from extreme oversold conditions for months.

Bond rally is providing relief