Weekly Chart Review
The defensive sectors are substantially oversold on a relative basis...
Just a quick post this week in light of the Memorial Day weekend. On that note, I hope everyone had a great Memorial Day weekend and that you took a minute or two to give thanks for our military personnel that paid the ultimate price so that we can enjoy the freedoms we have today in this country.
Sector Review
On an absolute basis, five of the eleven sectors, and the S&P 500 as a whole, are in the “Expensive & Overbought” quadrant of our chart on the right. Technology continues to be the outlier both in returns and in standard deviations.
On a relative basis, eight of the eleven sectors are in the “Cheap & Oversold” quadrant and six of those sectors are below -2.0 standard deviations suggesting they are extremely “Cheap & Oversold”.
As I noted last week, the market continues to be driven/supported by the strength of the Technology sector.
In terms of standard deviations, Technology is ranked as follows:
Week ending 05/19/23 -
Absolute = 2.33 standard deviations
Relative = 2.54 standard deviations
Week ending 05/26/23 -
Absolute = 2.87 standard deviations
Relative = 3.45 standard deviations
I made the following statement last week regarding where the Technology sector finds itself currently and what to expect:
“Typically, when any asset gets north of 2.0 standard deviations, this is where you would begin to look for either a corrective pullback or a consolidation move sideways.
It doesn’t mean that a corrective pullback or a consolidating move sideways will happen immediately, but your antenna should be up the longer Technology remains above 2.0 standard deviations.”
The Technology sector was up +4.64% last week and +4.33% the week before so I think it is fair to say that the corrective pullback or consolidating move sideways has yet to begin.
As I highlighted last week, the Technology sector is carrying the market YTD but it has been driven by only a handful of stocks, primarily, MSFT, AAPL, and NVDA. Last week was NVDA’s chance to shine with a +24.57% return for the week.
I showed the following chart last week and noted that NVDA was well north of +2.0 standard deviations and had been there for some time. Well, last week it blew through the +3.0 standard deviation mark. History would suggest that a move that far above the +3.0 standard deviation line is likely unsustainable.
Speaking of +3.0 standard deviations, as noted above and shown below, the Technology sector relative to the S&P 500 closed above +3.0 standard deviations as well. This has only happened seven times since 2000. Each time it occurred, Technology either immediately sold off the next week or consolidated for a few weeks before having a multi-week drawdown period.
Conclusion
When Technology begins to move lower, given its weight in the S&P 500, it will likely take the rest of the market with it. When that happens, you will see investors move toward the more defensive sectors (i.e., Consumer Staples, Utilities, and Health Care…and sometimes Real Estate).
Note in the “Relative Value” chart above how “Cheap & Oversold” these defensive sectors are currently. It might not be a bad idea to take a look at those sectors before the pending correction begins.
Until next time…