TSLA’s surge and strong AMZN are not enough | RRG chart

Concerns remain.

My concerns about current market developments that I mentioned in last week’s article remain valid. As you can see in the relative rotation graph above, current sector rotation does not support a strong rally in the S&P 500.

In particular, the strong direction in the tails of XLU and XLP suggests that a rotation into the defense sector is underway. This observation has been further strengthened by the recovery of relative momentum in the Healthcare sector (XLV).

Another tail that is inconsistent with a strong bull run in $SPX is XLY, which is inside the lagging quadrant and moving lower on the JdK RS-Ratio scale in the negative rg direction.

AMZN and TSLA Can’t Lift the Sector

An interesting observation about the cycle in the consumer discretionary sector is that only two stocks account for a large portion: Amazon and Tesla. Together, they account for about 38% of the sector’s total market capitalization. Typically you see a few mega/cap stocks having a huge impact on the direction of the sector as a whole, but that’s not the case here.

Both stocks have shown positive returns over the past five weeks, outperforming the Consumer Discretionary Index, while XLY has underperformed SPY.

Although both stocks have different positions in RRG, both contribute positively. Amazon has just moved from the leading quadrant to bearish, showing a very short tail. A short tail indicates that this stock is in a stable relative upward trend. Tesla, on the other hand, has a longer tail and is moving toward improvement in the lagging quadrant toward positive rrg.

The performance table, which can be found below the relative rotation graph, highlights the differences in the performance of the two stocks and the Consumer Discretionary sector index. Tesla is up nearly 22% over the past five weeks, Amazon is up 4.2%, while XLY is up just 3.5%. I added SPY as a reference, and it showed a performance of almost 7% over the same period.

So what does it mean when a large sector like Consumer Discretionary underperforms the SMP500 and outperforms the sector by a third of its market capitalization?

This means that internally, the situation is much worse for the sector as a whole.

This can be visualized using equal-weighted sector rotations instead of capital-weighted sector rotations.

The RRG above shows tails for both XLY and RSPD, using SPY as the benchmark. Although both are within the trailing quadrant, note that RSPD’s tail is steeper and longer than that of XLY.

Despite the RSPD’s lower RS ​​ratio measure, its long tail and lower RS ​​momentum measure indicate further progress in the relative downtrend.

So far, AMZN and TSLA have been unable to turn this situation around at the sector level.

Only large-cap stocks can grow

The final observation I would like to share in this article is the difference in rotation between large-cap, mid-cap, and small-cap stocks in both the value and growth sectors.

In the RRG above we can see massive growth as the only sector in a positive RRG direction, while internally the weakening quadrant is moving back towards the leading quadrant. This rotation indicates that a new uptrend is underway in an already established relative uptrend.

All other tails are rolling or rotating towards the lag quadrant or are already in it.

This means that current market strength is primarily driven by the large-cap growth sector, which includes NYFANG+ and MAG7 stocks, which have a significant impact on the performance of $SPX.

So far it’s going okay, but how long will it take? As always, this discrepancy can be resolved in two ways: That means the price of $SPX could either fall to get back in line with a more defensive rotation, or there could be a prolonged sideways move to digest the recent uptrend.

Alternatively, the sector rotation shifts towards more aggressive sectors and small and medium-cap sectors, joining the large sectors in the more positive areas of the RRG.

#StayAlert Have a great weekend. –Julius

Note: Sector Spotlights have been discontinued, but are back on StockCharts.com. This is a YouTube channel that hosts a show every Monday.