By Eric Bush, CFA
2016 has been a rough year for health care as we have noted in several recent blog posts (see here and here). On an equal-weighted basis, the US health care sector is off over 8% this year while no other sector is down more than 4%. Given that health care has been the undeniable equity leader over the past four years, is this a sign that equity leadership is finally changing? Maybe. While we wish we could give a confident “yes” or “no” to this question, it is still a tad too early to say if health care is breaking down or if this is momentary performance blip. And as you will see, if health care is giving way to another sector, the second best performing sector over the last four years, consumer staples, seems to be ready to move into the top sector position.
In the point and figure charts below, we are looking at the absolute performance of 10 vanguard USA sector ETFS. The sector ETFs track the respective MSCI USA IMI sector benchmarks.
As we noted above, consumer staples has the brightest outlook. It just broke out to new highs and did so by creating a triple top. This is a very bullish configuration.
Utilities is the second best looking sector as it is clearly in an uptrend and the prospect of a topping formation doesn’t look to be on the horizon. As you will see, this is a concern for the next several sectors.
Info tech is our third best looking sector. The best thing tech has going for it is a tested high-performance bullish support line. If tech breaks through the bullish support line the concern would be that this sector is putting in a top. However, until that happens the trend still seems to be up.
Industrials is our fourth best looking sector and the chart looks a lot like the info tech chart. The reason we have it slotted slightly below tech is because the high-performance bullish support line (purple line) hasn’t been tested as frequently and a failure to move to new highs could be a sign that industrials is facing a major top. However, if industrials does move to new highs then the move higher could be quite explosive given the triangle formation that is brewing. Something for investors to keep an eye on.
Consumer discretionary is our fifth best looking sector and once again the chart formation looks quite similar to info tech and industrials. Consumer discretionary successfully broke through bearish resistance line but it is far from clear whether it will be able to power to new highs. If it doesn’t, it would seem a multi-year top is in place and the nearest support is quite a bit a way.
Health care is at a make or break point in our point and figure charts. It has gradually been consolidating into a tight wedge and the move here will most likely be explosive either higher or lower. If it breaks lower there is quite a bit downside for the health care sector. However, if it can move higher it wouldn’t take to long to start making new highs again. Time will tell for the health care sector.
Financials looks a lot like health care, however, it seems to be a bit closer in finishing its topping formation. A breakdown from here would most likely confirm that a top in financials is in place.
Telecom comes in at 8th place. It looks to be stuck in a low-vol trading range.
Materials has been the second best performing US sector so far in 2016. However, the rally has only brought materials right back into resistance. The trend for materials still looks like it is down.
Finally, we have energy. The trend in energy is still clearly down even with the latest rally. Like materials, the rally has brought energy right back to resistance. It would be surprising for energy to power higher as there is a lot of overhead resistance. The more likely bullish scenario is for energy to trade sideways for a while and for a strong base before moving higher.
When we look at US sectors, it is clear the market is at a crossroads. There hasn’t been a clear leadership trend change that one would have hoped to have seen off the February lows. Consumer staples and utilities seem to be the only sectors that remain in a clear uptrend. The majority of the sectors are at a make it or break it inflection point of whether the trend is towards higher prices or if we have put in multi-year tops. Unfortunately for those looking to add cyclicality to their portfolio, materials and energy remain in downtrends until further notice. The rally over the past month or two has not been enough to change the trend in these sectors.