The Best Five Sectors This Week #72
Key Takeaways
- Financials entered the top five, replacing energy, which dropped to seventh.
- Technology remains dominant, but saw its weight reduced from 70% to 59%.
- Industrials and materials show strength, while energy nears the lagging quadrant on the weekly RRG.
- The portfolio performance gap widened slightly again to just over 6%.
After a week where the S&P 500 slipped just over 2%, the sector rankings is showing some shifts. The most significant change is the entry of financials into the top five, pushing energy out of the leading group.
Financials Enter the Top Five as Energy Falters
Technology continues to dominate, holding the number one spot, followed by industrials and real estate; there are no changes among the top three. Materials climbed from fifth to fourth place, while financials moved from sixth to fifth. Utilities also improved, jumping from eighth to sixth. Energy, however, experienced the steepest drop, falling from fourth to seventh. Consumer staples slipped one position to eighth, and healthcare, consumer discretionary, and communication services remain at the bottom, occupying the ninth, tenth, and eleventh spots, respectively.
- (1) Technology - XLK [59%]
- (2) Industrials - XLI [13%]
- (3) Real Estate - XLRE [3%]
- (5) Materials - XLB [3%]*
- (6) Financials - XLF [21%]*
- (8) Utilities - XLU*
- (4) Energy - XLE*
- (7) Consumer Staples - XLP*
- (9) Health Care - XLV
- (10) Consumer Discretionary - XLY
- (11) Communication Services - XLC
Shifting Weights in the Top Five
Beyond the rankings, the most striking development is the shift in sector weights. With financials entering the top five and carrying a substantial 13% weight, technology’s dominance has lessened from over 70% to 59%. This reallocation is needed to free up capital to achieve the required overweight in the financials sector.
Despite only one sector change, this represents a significant adjustment in the weighting scheme.
Weekly RRG
On the weekly Relative Rotation Graph (RRG), technology remains the sole sector in the leading quadrant, while most others are lagging. Energy is on the verge of crossing into the lagging quadrant, a move that already materialized after Monday and Tuesday’s trading. Technology’s momentum is fading slightly, allowing the other top sectors to gain traction on the weekly chart.
Daily RRG
The daily RRG provides further clarity. All five top sectors are positioned on the right side of the graph, signaling relative uptrends in the daily timeframe. Industrials stand out as the strongest, moving sideways, while financials, materials, and real estate are losing some momentum but remain in favorable positions. Technology, though currently in the weakening quadrant, is heading back toward leadership, reinforcing its strength on the weekly RRG.
Sector Highlights
Technology
The sector’s price chart remains robust, with a sideways movement consolidating gains from the April rally. Support is around 172.5, resistance just below 200. As long as prices stay within this range, the trend for XLK is intact. Relative strength is high, though some consolidation could occur.
Industrials
After breaking out of consolidation, industrials are holding up well within a rising trend channel. The relative strength line is rebounding, and the sector’s outlook is mildly positive on both weekly and daily RRGs.
Real Estate
Facing resistance near 45.5, real estate has been volatile and mostly sideways. The long-term downtrend in relative strength has paused, but a breakout is needed to reverse it. The RS-momentum line is starting to rise, which could eventually further improve the sector’s standing.
Materials
Materials failed to sustain their breakout from three weeks ago but remain above rising support. The sector needs to overcome overhead resistance to improve relative strength. RS-momentum is turning up but requires further progress.
Financials
Financials have shown the most improvement recently, with a pattern of higher highs and higher lows emerging. The sector is testing resistance around 55.5 and 56. Relative strength is still in a downtrend but is showing signs of improvement. If RS-momentum crosses above 100, financials could become the sector with the most upside potential.
Portfolio Performance Update
Last week, the portfolio’s gap with the S&P 500 widened to just over 6%, up from below 5%. The strategy is closing in on the S&P 500, and it will be interesting to see how long it takes before it overtakes the benchmark once again.
#StayAlert, --Julius
