The Deep Dive
This week we’re revisiting the communication services sector. YTD it is the second-best performing sector (+36% through the end of last week), a remarkable turn considering it was 2022’s worst.
An early January edition of this report helped to sniff out that turn, though I certainly didn’t expect it to be so dramatic. It’s early and the sector is still in a leadership position, but in a reversal of the report 6 months ago, there are some signs that at least the sector’s relative strength could be shifting.
Today’s report will review:
Current technicals from a top-down perspective
Where the sector fits in the market’s rotation
Top stocks testing key levels
Stocks to avoid
Let’s dive in!
XLC: Communication Services Select Sector SPDR Fund
XLC has broken out from two inverse head and shoulders patterns, the larger of which measures to $75/share. My marked target is just below that, at the April 2022 highs. Regardless, the sector hit a 52-week high as recently as Friday and there is little in the momentum indicators to suggest the risk of anything larger than a routine pullback.
RRG shows comms falling into the “Weakening” quadrant
I’ve shared the Relative Rotation Graph (RRG) in the Monday Morning Playbook, but want to quickly break down the quadrants and what they mean:
Leading: Outperforming with strong momentum
Weakening: Outperforming, but momentum is waning
Lagging: Underperforming with weak momentum
Improving: Underperforming, but momentum is improving
The RRG is a visualization tool first and foremost, and sectors don’t have to go in perfect circles around the graph. However, while communication services is still outperforming, the momentum of its leadership appears to be waning. Importantly, the RRG is all about relative performance and doesn’t tell you if sectors are going up or down in absolute terms.
XLC vs. SPY ratio confirms the RRG
The technicals of the relative strength chart do confirm what the RRG suggests. Looking at RSI-14 in the middle panel, you can see momentum has been slowing for XLC:SPY even as the sector continues to outperform. With the 50-DMA acting as clear support, there is no reason to think communications has given up leadership until it is broken.
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