This week the Global Industry Classification Standard (GICS) expanded the Telecom Services sector to include Consumer Discretionary and Information Technology components, with it being renamed the Communications Services sector next Friday, September 28th.
In this post I want to highlight the major changes to the sector classifications, chart the new sector (using the back-filled IXCPR Index), and then finish up with some of the components that are the most actionable. State Street, which runs the popular Sector SPDR ETFs, has created a comprehensive document on these changes that I’d encourage you to read in full to understand all the nuances surrounding these changes.
The purpose of this reclassification is to broaden the sector’s reach and reflect modern communication activities and information delivery mechanisms. The new sector will represent roughly 10% of the S&P 500, up five-fold from the roughly 2% weighting of the current Telecommunications Services sector.
- More than 10% of the S&P 500 Index Market Cap will be re-classified into the new Communication Services Sector
- 100% of the S&P 500 Telecommunication Services Index
- 22% of the S&P 500 Consumer Discretionary Index
- 21% of the S&P 500 Information Technology Index
Click on table to enlarge view.
As we can see in the chart above, the reclassification will cause the weight of the Tech sector to fall roughly 5% from 25% down to 20%, and the Consumer Discretionary sector to fall 3% from 13% down to 10% of the S&P 500’s weighting.
Historically the Telecommunications Sector was value oriented and viewed as a bond-proxy due to its makeup of mature companies with high dividend yields, however, with this switch the sector will become more tilted toward growth and the dividend yield will fall from more than 5% to under 2%
So what does this all mean? Well, for us it simply means that we need to be aware of these changes when we’re doing our analysis. Historical comparisons will become a bit more difficult and the use of back-filled data will have to do until the sector ETF XLC has more price history.
For Portfolio Managers and others on Wall Street that have benchmarks they’re battling each quarter, these changes are likely significant and will impact how they’ll have to approach the market going forward. Overall, the impact of these changes really depends on who you are as a market participant, but hopefully since these changes have been telegraphed for a long time people are prepared and things will be business as usual.
Now that we understand the changes, let’s take a look at the sector on an absolute and relative basis using back-filled data.
On an absolute basis, the Communications Services Sector is in a structural uptrend. Yes there’s a failed breakout above the January highs and a large bearish divergence in momentum, but prices aren’t crashing. They’re correcting sideways within the context of a monster uptrend.
Click on chart to enlarge view.
On the daily chart we’re seeing something similar. Prices are above a rising 200-day moving average and right back near support, and momentum hasn’t gotten oversold during this correction. These are all positive signs that suggest this is a healthy correction and that this range should ultimately resolve to the upside.
On a relative basis things are a bit more messy. Despite the ratio being in a structural uptrend, prices continue to struggle with resistance that’s been in place since April 2017. Prices are now making new year-to-date lows and testing a confluence of support while momentum remains in a bullish range. If you’re bullish the sector, you want to see buyers step in here and hold this level. Below the December 2016 lows, things get messier.
Here’s a more tactical perspective on this relationship using the daily chart. Prices are now making new 18+ month lows and momentum is getting oversold. The flat 200-day continues to suggest this is a headache we want to stay away from until it resolves itself in one direction or another.
Within this new sector there are a lot of charts that aren’t that actionable, many of which we’d say are in the “hot mess” category, however, there are a few names worth looking at on the long side.
First up is Google, which from a structural perspective remains a long if we’re above 1,180, with a price target up near 1,830.
Activision couldn’t hold onto its breakout in March or July so we want to be a bit more cautious and waiting for a breakout above 81.65 to get long, with an upside target of 108.
Take-Two Interactive Software Inc. broke out a month ago, so we want to be long if prices are above 125.35 and taking profits up near 147.35.
Despite Netflix correcting roughly 27% in 2 months, prices remain above our former target of 305 and a rising 200-day moving average. If prices can close above 381 we can be long with an upside target of 445.
Disney is the last name we want to be watching. If prices can clear this consolidation by getting above 116, then we can be long with an upside target of 140.50.
Thanks for reading and let us know if you have any questions!