Tech, Consumer Discretionary Continue To Lead US Equity Sectors

Positive momentum has continued to shine as a forward indicator for technology and consumer discretionary stocks in recent months. Both sectors remain the sector leaders in the US, based on a set of exchange traded funds through yesterday’s close (Aug. 12). Meanwhile, the lagging sectors show few signs that a turnaround is imminent.

Technology Sector SPDR (XLK) is holding on to the top year-to-date performance by a wide margin. The fund is up 25.3% so far in 2020. Yesterday’s rally left the ETF just 1.3% below its previous record close, set on Aug. 6.

Tech’s ongoing strength is starting to inspire looking to other corners of the market for leadership in the months ahead.

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“Cyclicals are catching investor interest again,” advises Nicholas Colas at DataTrek Research. “As the US economy heals, these offer the possibility of considerable operating leverage and therefore earnings surprises. Second, [investors] figured out tech and health care fundamentals are great but where can they really go from here?”

The second-best sector performer this year: consumer discretionary. Consumer Discretionary Select Sector SPDR (XLY) has enjoyed a strong rally in recent weeks. The ETF, which holds the likes of Home Depot and Starbucks, is up 15.4% this year.

The biggest losers in 2020 remain financials (XLF) and energy (XLE), which are down 16.7% and 33.4%, respectively, through yesterday’s close. Most of the red ink unfolded during the March crash. Both funds subsequently posted partial rebounds but have been mostly treading water for the past two months.

Stocks overall are up 6.0% year to date, based on SPDR S&P 500 (SPY). That’s a solid return given all the market turmoil earlier in the year, when the coronavirus crisis derailed the bull market. But after yesterday’s rally, SPY is at a new record high (the S&P 500 Index, which SPY tracks, remains slightly below the record high reached in Feb.).

The upside bias in the broad market has been accompanied by rising worries of what comes next.

“There’s a big debate happening in the market right now,” notes Yousef Abbasi, global market strategist at StoneX. “Does the tech outperformance continue? Or does hope around a vaccine, a better-than-expected Q2 earnings season and the hope the strong economic data continues to hold up start to justify the idea that some froth should probably come out of tech?”

Profiling all the sector ETFs listed above through a momentum lens continues to indicate a strong rebound in the short-term data. The profile in the chart below is based on two sets of moving averages. The first measure compares the 10-day average with its 100-day counterpart — a proxy for short-term trending behavior (red line in chart below). A second set of moving averages (50 and 200 days) represent an intermediate measure of the trend (blue line). Data through yesterday’s close shows that bullish short-term momentum has rebounded dramatically as longer-term momentum (blue line) continues to play catch-up.

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