Four Sectors Pushing Overall Market Higher

Watching the overall market rebound from the March low has been fascinating and frustrating at the same time. Some stocks have experienced incredible rallies while others have experienced far more modest rallies. The S&P 500 has rallied 47.2% from its March low and it has been less than four months since the market bottomed. The Nasdaq Composite has been even more impressive with a gain of 59.1% over the same period and it has reached a new all-time high in recent weeks. The S&P hasn’t quite reached the February high just yet.

While the rally has been welcomed by most investors, bears excluded, of course, it hasn’t treated investors equally. If we look at the 10 main sectors and the corresponding SPDR ETFs that represent them, the rally has essentially been fueled by four sectors—communication services, consumer discretionary, healthcare, and technology. All four of those sectors have seen their Select Sector SPDR ETFs hit all-time highs in the last two weeks.

You Might Like
Learn more about RevenueStripe...

Conversely, four sectors aren’t even close to getting back to the levels they were at prior to the meltdown that started in February—energy, financials, industrials, and utilities. The other two sectors, consumer staples and materials, are close to getting back to the pre-meltdown levels.

Looking at the year to date performances of the indices, the four reaching all-time highs are the only ones in positive territory for the year and that makes sense. If we look at the returns since March 23, the energy sector has led the way, but if we look at the weekly chart we see it isn’t even close to the $52.50 level that it was at before the pandemic took its toll.

The Energy Select Sector SPDR (NYSE: XLE) has rallied over 60% from the March low, but it is still down over 35% for the year. At the low in March, the XLE was down almost 60% on the year. This goes to something that I think people forget sometimes and that is how percentages work. I try to remind people all the time that an investment that drops 50% has to rally 100% to get back to where it used to be. I usually use this statement when I encourage people to have a stop-loss set or at the very least have an exit plan when they enter a trade.

If we look at the weekly chart for the Technology Select Sector SPDR (NYSE: XLK), we see that it was down approximately 23% on a YTD basis on March 23. It has since rallied 53.3% off the March low.

This goes back to the article I wrote earlier this week about how much growth has outperformed value. The tech sector is very much a part of the growth segment of the market and has helped create the scenario I talked about.

So what does all of this mean for the sectors going forward? Historically, as I pointed out in the previously mentioned article, when we have had bear markets or pullbacks, the growth segment has been hit harder than the value segment, but that didn’t happen in the February/March pullback. I do think we will see the gap between growth and value close up during the second half of 2020 and that could happen in a couple of different ways.

First, we could see the growth sectors (tech, consumer discretionary, communication services, and healthcare) pullback while the value sectors move sideways or even move up a little. The second possibility is that we see another downward move in the overall market and the growth sectors get hit harder this time around and the value sectors fall, but not as much as the growth sectors.

The four sectors that have reached new all-time highs, their weekly stochastic indicators are all in overbought territory, so we could see a bit of a reversion to the mean. The consumer staples sector is also overbought based on the weekly stochastic readings.

The only sector where the stochastic readings are below 50 is the energy sector, but I don’t know that energy is ready to rally sharply—it just might not fall as much as the others if we see another pullback.

Financials are facing problems of their own and as the earnings reports from this week have shown, banks are preparing for a great number of loan losses and defaults. The materials sector is close to overbought right now, but isn’t quite there.

The only two sectors I haven’t mentioned at this point are industrials and utilities. The Industrial Select Sector SPDR (NYSE: XLI) is still 17.7% below its all-time high and isn’t in overbought territory yet. The Utilities Select Sector SPDR (NYSE: XLU) isn’t in overbought territory, but it does face some resistance. There are a couple of possible technical indicators that suggest the XLU may drop in the coming weeks, but that might provide a buying opportunity.

Personally, I think the XLU and XLI are probably the best bets to outperform the other sectors over the second half of 2020. If these two sectors outperform the four growth sectors, we will definitely see the gap between growth and value close before the end of the year.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

Leave a Reply

Your email address will not be published.