A Déjà Vu in The Shopper Staples Sector Sends a Sturdy Warning Sign

Tech Rallies, However Stays Contained in the Lagging Quadrant

A fast have a look at the Relative Rotation Graph for US sectors reveals that the Expertise sector remains to be the primary driving drive for the market. Expertise now makes up greater than 30% of the market capitalization of the S&P 500, so it considerably influences the worth (motion) of the S&P 500 index.

On this weekly RRG above, the XLK tail could be seen heading additional into the lagging quadrant, along with XLC and XLE.

After dipping to the 540 space on the finish of final week, the market has recovered a few of that floor thus far this week. This transfer has now established the world round 540 as assist, whereas overhead resistance nonetheless stays intact round 565. A break of both degree will very seemingly ignite an acceleration within the route of the break.

On the weekly RRG, this transfer has had no materials influence thus far.

The Every day RRG Reveals Some Enchancment

Solely when zooming in on the each day Relative Rotation Graph can we see this week’s enchancment.

What’s fascinating to see on this each day RRG is that the identical three sectors which might be contained in the lagging quadrant on the weekly RRG are additionally contained in the lagging quadrant on this each day RRG. XLC and XLE clearly verify their relative downtrends by rotating at a unfavourable RRG-Heading.

The uptick in tech shares thus far this week has prompted an enchancment in relative momentum, however not (but) in relative power.

However It is Based mostly On a Slim Basis

Zooming in on the know-how sector members and utilizing the desk beneath to look at their efficiency over the past 5 buying and selling days, we discover the RRG offers some perception into the place this bounce in efficiency is coming from.

With XLK up 5% thus far this week, solely 9 out of the 50 shares on this group outperform SPY. The opposite 41 are beneath XLK. With NVDA being one of many top-ranking shares, this group is already pulling efficiency up by its market capitalization, particularly as a result of MSFT, the opposite massive identify inside XLK, is just 0.5% beneath XLK.

Subsequently, the muse of this tech rally thus far may be very slim. Once more.

Based mostly on these observations, I’ll decide the present tech rally as a restoration inside a longtime relative downtrend.

Defensives Pushing Into Main RRG Quadrant

On the alternative aspect of the spectrum, three sectors appear very nicely positioned for additional outperformance. XLV (Well being Care), XLF (Financials), and XLP (Shopper Staples) have all simply entered the main quadrant, which implies a turnover from a relative downtrend right into a relative uptrend towards SPY. All three are rotating at a optimistic RRG-Heading, and all three are displaying an growing RRG-Velocity.

Taking a look at their particular person charts mixed with relative power and their RRG-Traces, one sector stands out with a setup we’ve seen earlier than.

Shopper Staples

On the finish of 2021, the patron staples sector ended a chronic interval of underperformance (20 months), marked by the primary vertical dashed line in November 2021, when the RS-Line broke above a falling resistance line. By then, the JdK RS-Momentum line had already crossed above the 100 degree, pushing the XLP tail into the bettering quadrant.

A couple of weeks later, the JdK RS-Ratio line additionally crossed above 100, and the tail moved into main. Shortly after that transfer, the market began to drop, and XLP began to serve its position as a defensive sector, outperforming SPY for greater than a 12 months whereas the market (SPY) dropped 20%.

Quick Ahead to the Current

The RS-line of XLP has damaged above its falling resistance after a downtrend that began on the finish of 2022, so nearly two years in the past — 21 months, to be precise. RS-Momentum rose above 100 a couple of weeks after that occasion, and this week, RS-Ratio additionally crossed above 100, pushing the XLP tail into the main quadrant.

The worth strikes on the SPY chart are nearly equivalent on each events. There’s a peak when the RS line crosses upward, and a second peak shortly after the RS-ratio line crosses above 100.

Given the defensive nature of the Staples sector and the analogy that appears to be enjoying out in the meanwhile, I’m maintaining my cautious/cautious method to the markets.

RISK > POTENTIAL REWARD

#StayAlert, –Julius