Tracking sector performance is one of the most important functions in my research and it is deeply imbedded into my broader macro work. Drilling down into sector specifics allows me my first peak under the hood to examine the overall health of the U.S. Equities market. It also helps me to locate the areas of the market that I want to focus my investment strategies from a long, short and just plain “stay away” perspective. Much of sector analysis that I have seen in the past revolves purely on a relative strength comparison of sectors and leaves the price charts to take a back seat. For me (and others), I believe that looking at both charts instead of one in isolation provides a bit further insight.
With that said, I would like to wind down the year, not with a review of 2014, but a look ahead to 2015, which could be a critical year for equities investors. As this is intended to be a yearly outlook, the longer-term charts tend to drive my views as well as filter out some of the dust likely to be kicked up. Lastly, the use of sector ETFs just eases the implementation of any investment strategies one might seem fit.
Note that I will cover the 10 major sectors of the market in 5 posts (2 sectors per post). In this post, I will cover the Information Technology sector and Telecom sector.
Information Technology Sector – Vanguard Information Technology ETF (VGT)
This weekly relative strength (RS) chart is fairly straightforward and provides a handy guide for ones sector portfolio allocation into 2015. While VGT trades within this broad 2-year uptrend channel, the intermediate term RS trend favors the most heavily weighted S&P 500 sector. A price breakout above the channel further strengthens the relative importance of the Information Technology sector, while a breakdown below the bottom of the range could imply a change in leadership and perhaps have a greater detrimental impact to US equities on the whole.
Given the extent of the run-up in many of the US sector ETFs over the past couple of months, a look at the daily charts will likely provide enough guideposts to manage our risks for the upcoming weeks and perhaps months to come. With that said, the first real key test to the downside to monitor looks to coincide with the Sep. 2014 high and the Nov. 2014 breakout level near 102.42. Secondary support appears in the 99-101 area or the 50-day moving average (dma) and the 50% Fibonacci retracement of the Oct. 2014 rally.
Telecom Sector – Vanguard Telecommunication Services ETF (VOX)
The Telecommunication Services Sector via VOX has steadily underperformed the overall market over the past two years or so, but the recent sharp decline could prove to be quite damaging as it has broken through the bottom of its ~2-year downtrend channel. There are now a couple of things likely to happen in my view, at least from a relative strength perspective. The first is that the underperformance continues or even accelerates near-term; or secondly it sees some reprieve to retest the bottom of the channel. This will be a key near-term test as failure to reclaim this channel could set the stage for another downdraft. On the other hand a push back into the channel could alleviate some of the pressure, but bear in mind that the dominant relative trend remains down and is likely to continue into 2015, in my view.
The daily chart below depicts the recent technical breakdowns in terms of both price and relative strength. Note the 12/9/14 downside gap and how it closed the 10/28/14 upside gap in strong fashion. The top of this gap at 86.57 will now act as near-term resistance, while the Oct. 2014 low of 81.79 should play a key role as downside support.
To conclude, sector rotation occurs and rising and falling leaders will emerge and disappear, but until the dominant technical trends that I have highlighted here show signs of failing I will remain a believer that the trend will resume in a timely fashion. Should signs of technical weakness/strength change the charts enough to alter my outlook, well, then my outlook will alter as necessary. The beauty of technical analysis!
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No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
