This week’s market commentary will cast a wide net, covering topics such as last week’s moves, sector ranks, investor sentiment, market breadth, and our chart of the week: Communications.
Last Week’s Market Action
Most markets declined last week, led by shakiness in the Information Technology sector. The sector was down -2.34%, while 8 of the 11 sectors were actually up for the week. Information Technology is the largest sector in the S&P 500 by a considerable margin, accounting for 30% of the S&P 500’s market capitalization. The next largest sector is Financials, which represents 12%. So goes technology, so goes the market.
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Friday’s market action was interesting. After being down -0.80% at one point during the trading day, the S&P 500 rallied in the last 30 minutes of trading to finish up +0.80%. All 11 S&P 500 sectors were up on the day, yet the Nasdaq 100 (technology-related index) was down. I imagine that does not occur very often, if ever. A single trading-day is nothing of note, but the fact was interesting, nonetheless.
Sector Ranks
According to Canterbury’s risk adjusted sector rankings, which account for a security’s relative strength and level of volatility (risk), the Communications sector is now the 3rd ranked sector, rising 3 sector ranks over the past week. More on that later, in our “chart of the week” segment.
The top ranked sectors are Utilities, Financials, Communications, and Consumer Staples. The bottom ranked sectors are Energy, Consumer Discretionary, and Real Estate.
Investor Sentiment
Sentiment is a contrarian indicator. That means investors feel more optimistic closer to peaks, and more pessimistic near market bottoms. This year has seen extraordinary amounts of “bullish” or positive sentiment among investors, according to the Investor Sentiment Survey that is published weekly by the American Association of Individual Investors.
The latest survey (published 5/29) showed that 39% of investors were bullish; 27% were bearish; and 34% were neutral. While bullish sentiment fell over the week, it remains above historical averages. Here is a quote on those numbers, from the AAII:
Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 8.0 percentage points to 39.0%. Bullish sentiment is above its historical average of 37.5% for the 29th time in 30 weeks.
The bull-bear spread (bullish minus bearish sentiment) decreased 8.4 percentage points to 12.3%. The bull-bear spread is above its historical average of 6.5% for the fourth time in seven weeks.
Investor sentiment tends to fluctuate with the markets, which is why it is a contrarian indicator. When markets are strong, sentiment is high. If markets become choppy, bullish sentiment will tend to decline. Extreme optimism or extreme pessimism will tend to precede a move in the opposite direction. Right now, sentiment is not extreme in either direction.
Market Breadth
A rising tide should lift most ships. A market led by a select few, large stocks, while smaller components waver, is not a healthy market. Right now, market breadth appears to be strong.
The advance-decline line, which measures market breadth, is confirming the market’s upward moves. Most stocks are advancing along with it, and a rising tide is lifting most ships.
Chart of the Week- Communications (XLC)
One month ago, on April 29th, our market commentary featured T-Mobile stock (TMUS). That update can be found here. Here is a quote from that commentary:
While T-Mobile has trended sideways over the last 4 months, it has had some positive technical developments, such as rising MoneyFlow and rising relative strength. The stock is now in a crouch. It’s only a matter of time before it makes a move, one way or another.
Last week, T-Mobile broke out of that trading range to the upside. T-Mobile stock is in the Communications sector, which will be our featured chart of the week in this Commentary.
Here is a chart of the Communications Services Select Sector SPDR ETF (Ticker: XLC).
Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software.
- At point 1, you can see that XLC has been in a small trading range after making a high. Following the peak in late April, the ETF declined to a level of support and held. Now, XLC is matching that April high water mark and attempting to break above it.
- Even while XLC was increasing in price to its high in April, its MoneyFlow index was moving sideways. MoneyFlow is a volume indicator that measures “smart money.” Volume should confirm price move. After its recent decline, MoneyFlow has been very strong as XLC has increased. While the ETF is at the same price level as it was in April, MoneyFlow is at a new high.
- With market breadth being strong, it makes sense that XLC’s relative strength the S&P 500 has been relatively flat in 2024. Improving market breadth means that more than just a few sectors are participating. Recently, however, XLC’s relative strength has begun improving. This was also highlighted in our Sector Ranking comments.
The Communications Services sector is one of the better performing sectors on a risk-adjusted basis this year. It should be noted that, like many S&P sectors, the sector is top heavy. Meta (formerly Facebook) accounts for 21% of the sector’s capitalization, while Google’s two share classes make up 26%. In other words, nearly half of the sector is in just two stocks. T-Mobile, Netflix, and AT&T are the next three largest stocks in the sector, combining for 12% of its capitalization. (Source: XLC holdings on 6/3/2024).
Even if the sector is top-heavy, investors can get exposure to its larger components with the likelihood of having lower volatility by investing in the Communications ETF.
Other News
Our Canterbury team has started a podcast! The new podcast, Investor Insights, seeks to educate investors on a variety of investment topics. Our first episode is titled “Lessons Learned from a Career in Investing” and can be streamed on Apple, Spotify, or Amazon. You can also listen on our website, here.
For more news, information, and analysis, visit the ETF Strategist Channel.
Every effort was used to provide accurate data and mathematical calculations to provide what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.