Sector Rankings and Market Movement

Canterbury Investment Management April 3, 2024

Our last market commentary, titled March Market Madness, compared some of the market’s stocks to different teams in the NCAA tournament field. If you haven’t read it, it is a fun and short read that can be found here.

A portion of that commentary focused on how the market was experiencing “parity.” Unlike most of last year, which saw the markets be led mostly by technology-related stocks, the markets are now seeing a rising tide lift most ships. In other words, there is more market participation.

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Magnificent 7

More market participation means that stocks outside of the largest components are becoming stronger. Not only that, but some of the largest components are becoming weaker.

So far in 2024, the “Magnificent 7” has turned into the “Magnificent 5.” While stocks like Nvidia, Amazon, and Meta are in the upper quartile of S&P 500 stock performers, and Microsoft and Google are in the upper half, Apple is in the bottom 5% of performance. Tesla ranks last out of 504 index components.

Sector Ranks

The sectors that are leading the way today are very different from the sectors that led for the majority of last year.

Five months ago, Communications, Information Technology, and Consumer Discretionary were all in the top four of our risk-adjusted sector rankings. These three sectors have heavy exposure to technology-related stocks. Now, Information Technology and Communications rank 5^th and 6^th in our sector rankings (out of 11 sectors), and Consumer Discretionary ranks last.

The top three ranked sectors right now are Financials, Industrials, and Basic Materials. Those three sectors were in the middle of the rankings five months ago.

Chart of the Week- Utilities

Each day, our technical system generates are report showing the ratings and rankings of 200 stock securities and 200 Exchange Traded Funds. The report shows us which securities are moving up and down in rank, and which securities recently started showing favorable technical characteristics.

This week, we will be featuring a chart on the Utilities sector ETF (XLU). Just two weeks ago, Utilities had been the last ranked sector and was in the bottom half of our universe of ETF rankings. In the last week, the sector has moved up 30 spots in rank and given an alert that it may be starting to show better technical characteristics.

Let’s have a quick look at a chart of Utilities.

Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software

The Utilities Sector ETF has been in a clear downtrend, as shown by the descending black line drawn across the sector’s peaks. It has consistently registered lower highs and lower lows. Last week, the sector ETF broke out of this trend line with a new relative high, surpassing its peak from early November.
While the ETF has declined, volume indicators have mostly moved sideways. The MoneyFlow Index recently broke to a new high. In other words, volume is confirming the recent move in price.
Utilities is above both its 50-day moving average of price and 200-day moving average of price. This is positive, but ideally, we would like to see the shorter moving average (50-day) cross above the longer moving average (200-day). This would strengthen the likelihood of a change in long-term trend.

Utilities was previously the worst ranked sector, and one that was in a significant downtrend, but is now starting to show more favorable characteristics. This echoes the statement that the market breadth (participation) is becoming stronger.

Bottom Line

So far in 2024, we have seen a shift in sector rankings. Our commentaries this year have highlighted several charts that show the improvements of different stocks and market industries. Up through October of 2023, most of the market’s strength came from just one area: technology. Now, some of those technology stocks have faltered. The rotation in market leadership is positive. But be warned that if more technology-related stocks begin to decline, it could spell trouble for the markets given their inflated weightings.

Sentiment Survey

The average investor has a positive market outlook right now. Fifty percent of individual investors surveyed by the American Association of Individual Investors indicated that they were “bullish” or thought that market would be higher six months from now. This reading was well-above the historical average of 37.5% bullish investors. The spread between bulls and bears is even greater. Only 22% of those surveyed indicated that they were bearish.

Sentiment readings are extraordinarily high and have been for the last few months. The AAII, who conducts the sentiment survey, states that the survey is a contrarian indicator, meaning that high degrees of bullish sentiment occur near market peaks, while high bearish sentiment occurs near market bottoms. Keep in mind that high degrees of sentiment can stay in place for awhile before reverting.

Right now, volatility is low, and market breadth has improved. We are seeing a rising tide lift most ships. That is a bull market characteristic. We will continue to monitor and keep you informed if those indicators start to shift. If and when that does happen, our adaptive portfolio will make adjustments to reflect a new market environment.

For more news, information, and analysis, visit the ETF Strategist Channel.