- Entering 2022, Real Estate, Technology, Health Care and Consumer Staples hold down the top spots in our S&P 500 sector relative strength rankings.
- Our industry group-based heat map shows deteriorating conditions across Energy and Financials and improving conditions in Staples and Utilities. Leadership from defensive groups is not usually consistent with risk-on behavior.
- Energy slipped three spots (from 4th to 7th) in the large-cap rankings last week, and the sector appears even weaker beneath the surface. It’s in the ninth spot on an equal-weight basis, and conditions are deteriorating within the mid-cap and small-cap energy space.
- Technology remains atop the overall rankings, but relative strength on a short-term basis is from coming from Utilities, Real Estate and Consumer Staples.
- Financials sector has continued to slip in our relative strength rankings, falling to its lowest level in over a year and dropping out of the leadership group.
- Consumer Staples remain toward the bottom of the overall rankings, but have been the top-ranked sector on a short-term basis and we are seeing evidence of improving trends at the industry group level across market capitalization levels.
- Large-cap health care is rising in the rankings, but this strength is not echoed at the mid-cap or small-cap level (or even on an equal-weight basis at the large-cap level)
From the desk of Willie Delwiche.
Key Takeaway: Market breadth souring as new lows spike. Absence of breadth thrusts leaves the market adrift and vulnerable to cross breezes. Healthy appetites for risk likely lead to higher bond yields and commodities prices as well as improving broad market trends.
- With Energy and Financials experiencing short-term weakness, new leaders have emerged. Consumer Discretionary, Technology and Real Estate are in the top three spots in our relative strength rankings, showing leadership on both an equal-weight and cap-weight basis.
- Our industry group heat map shows Semiconductor strength is fueling the leadership coming from the Tech sector.
- Recent leaders have become near-term laggards, with Energy and Financials dropping to the bottom of the shorter-term relative strength rankings. Energy remains strong overall across the rankings and our industry group heat map. The cooling in Financials could be more significant.
- Materials is gaining strength from a sector ranking perspective and is seeing improving trends in our industry group work. We are also seeing pockets of strength within Industrials (Capital Goods and Transportation) and Tech (Semiconductors).
- Energy and Information Technology are at the top of the relative strength rankings. The industry group heat map confirms this strength with Energy and Semiconductor groups (up and down the cap scale) accounting for five of the top ten spots in the industry group rankings.
- Relative weakness can be found in Utilities, Consumer Staples and Health Care, trends that are echoed in both our sector rankings and the industry group heat map.
- Consumer Discretionary has been the top-performing large-cap sector on a short-term basis and was one of only two large-cap sectors to make new highs last week (Information Technology was the other). The sector’s relative strength at the large-cap level is not echoed among mid and small-caps, but it is still fairly broad-based (it’s equal-weight ranking matches its cap-weight ranking).
- Energy and Financials have lagged on a short-term basis, but remain at the top of our relative strength rankings across size levels.
- Paying attention to relative strength can help in two ways. It identifies leaders, to whom active investors can tilt toward, and laggards, from whom those same investors can tilt away. Up and down the size scale, Energy and Financials are leaders, while Utilities, Health Care and Consumer Staples are laggards.
- At the industry group level, mid-cap groups are seeing improving relative strength, while large-cap groups are seeing their relative strength deteriorate.