The technology sector’s secular leadership trend remains unbroken (see top panel of the charts below), but that don’t ignore the potential elsewhere. As Tom Lee has noted this week, more cyclical sectors, such as the S&P financials and industrials (see the center and bottom panels) are becoming more interesting for investors. It will pay to watch them. Here’s why: Though those two sectors have been in relative performance downtrends since early 2018, they are very near to reversing those downtrends.
Moreover, given my bullish technical outlook for equities overall through 2019, I expect to see performance improve across more and more cyclical sectors, such as financials and industrials. Keep an eye on the following: a move above the downtrends indicated by the blue arrows on the charts below would be one technical development to signal an improvement in these cyclical sectors. Since technology is already up a lot, the financials and industrials could prove rewarding too. Stay tuned.
Secular and cyclical growth sectors compared
Leader: As noted above, technology’s relative performance uptrend is intact. However, short-term trading indicators remain overbought, suggesting a temporary performance pause developing. Similar to technology, the relative performance of consumer discretionary remains steady with a short-term pause developing.
Laggard: Healthcare’s relative performance weakness persists, but as I mentioned here in the past two weeks, the sector looks oversold short-term. A rebound is developing, but it is unlikely the beginning of longer-term performance trend reversal. Keep the underweight.
In the bullpen: Potential trend reversals
Cyclical sectors continue in intermediate-term relative performance downtrends, but they are near upside inflection points that would support overweight sector positions.
Financials: Again, a potential positive trend shift is developing. Although the relative performance downtrends remain intact there are interesting developments: 1) the sector is oversold on intermediate-term basis; 2) financials are showing early signs of reversing downtrends. To support an overweight position, a move above the declining 200-day moving average and January relative performance highs would be needed.
Industrials: Here too a possible positive trend shift is apparent. Relative performance remains in volatile trading range near the 2016 lows with potential to bottom. What would turn the technical backdrop bullish? A move above the 2018-2019 downtrend would be a bullish technical development and establishing a new higher high would confirm a new uptrend.
Materials: There’s a potential downside trend shift. The sector continues to drift range bound, and, once again, is challenging the lower end of its 2019 relative performance trading range.
