Deja Vu in Consumer Goods Sector Sends Strong Warning Signal | RRG Chart

Tech Rally, But Still in the Back Quadrant

A quick look at the relative rotation chart of the US sectors shows that the technology sector is still the main driver of the market. Technology currently accounts for over 30% of the S&P 500 market cap, so it has a significant impact on the price (movement) of the S&P 500 index.

In the weekly RRG above we can see the XLK tail moving deeper into the lagging quadrant along with XLC and XLE.

After falling to the 540 zone last weekend, the market has regained some of that ground this week. The move has now established the 540 zone as support, with overhead resistance still remaining around 565. A break of either level is very likely to ignite momentum in the breakout direction.

In the weekly RRG, this measure has had no real impact so far.

Daily RRG shows some improvement

You can only see this week’s improvements when you zoom in on the daily relative rotation graph.

What is interesting about this daily RRG is that the same three sectors that are in the lagging quadrant in the weekly RRG are also in the lagging quadrant in this daily RRG. XLC and XLE rotate on a negative RRG heading, clearly confirming their relative downtrend.

Relative momentum has improved so far this week as tech stocks have risen, but relative strength has not (yet) improved.

But it is based on a narrow foundation

By zooming in on the Technology sector members and looking at their performance over the last five trading days using the table below, RRG provides insight into where this performance surge is coming from.

With XLK up 5% this week, only 9 of the 50 stocks in this group are outperforming SPY. The remaining 41 are outperforming XLK. With NVDA being one of the top stocks, this group is already outperforming by market cap, especially since the other large-cap stock in XLK, MSFT, is only 0.5% below XLK.

So the basis for this technology rally so far is very narrow, in other words.

Based on these observations, I would characterize the current tech rally as follows: Recovery within an established relative downtrend.

Defenders push into the leading RRG quadrant

On the other side of the spectrum, three sectors appear very well positioned for further outperformance. XLV (Healthcare), XLF (Financials), and XLP (Consumer) all just entered the Leading Quadrant, indicating a reversal from a relative downtrend to a relative uptrend versus SPY. All three are rotating into positive RRG headings, and all three are showing increasing RRG velocity.

Looking at the individual charts and the relative strengths and RRG lines together, it is clear that one sector has a configuration that we have seen before.

Consumer Goods Essentials

By the end of 2021, the Consumer Goods sector ended its long period of underperformance (20 months) as indicated by the first vertical dotted line, when the RS-Line broke the downtrend resistance line in November 2021. By then, the JdK RS-Momentum line had already crossed the 100 level, pushing the XLP tail into the improving quadrant.

A few weeks later, the JdK RS-Ratio line also crossed 100, with the tail moving to the leader. Immediately after that move, the market started to decline, and XLP started to act as a defensive sector, outperforming SPY for over a year, while the market (SPY) fell 20%.

Fast forward to the present

XLP’s RS-Line broke through the downtrend that began in late 2022. That was almost 2 years ago, exactly 21 months ago. RS-Momentum broke through 100 a few weeks after that event, and this week RS-Ratio also broke through 100, pushing XLP’s tail into the leading quadrant.

The price action on the SPY chart is almost the same in both cases. There is a peak when the RS line crosses upwards, and a second peak just after the RS ratio line crosses 100.

Given the defensive nature of the commodity sector and the analogies that emerge from the current situation, I remain cautious and cautious in my approach to the markets.

Risk > Potential Reward

#Be careful –Julius