The technology and consumer discretionary (cyclical) sectors were the top performers last week as the S&P 500 rallied back to just below all time highs. Here's the technical outlook for these sectors, and stocks to watch within each.
While the short-term view may make it appear like these sectors are once again becoming market leaders, that may not necessarily be the case. Over the last two months these sectors have been negative, with Energy, Utilities and the Consumer Staples showing the strongest performance. Generally these sectors perform well in late stages of a bull market, indicating the best days for technology and cyclicals may be behind us. That doesn't mean there isn't opportunity though, as certain stocks within the tech and cyclicals space are performing well.
Technology Select Sector SPDR (ARCA:XLK) still looks quite strong, but has given up ground in recent months to some other sectors. What appeared to be a break lower in April quickly failed as the price rallied back toward the $36.93 high. A break above $37 indicates the overall uptrend is still in place, but may not provide an ideal entry from a risk/reward perspective given the multiple false breakouts and expanding range the price has been in over the last two months. If the price breaks above $37, look for a continuation higher, with an entry on a pullback back toward the $37 region.
If the price breaks below the short-term trendline at $35.75, before making a new high, it signals further declines. Expect a test of the $35.25 region. If there is a drop below $35.10, the next support is the longer-term trendline at $34.50.
One stock to keep an eye on in the technology sector is Avago Technologies (Nasdaq:AVGO). Up more than 100% year-to-date (YTD), it pulled back in April but is once again testing the high at $65.83. If the price moves beyond high it could run again, especially given the strength of the trend. First target is $72.50, although the price could go higher over the longer-term. If the stock fails to make a new high though, and drops below the short-term trendline at $61.25, expect a retest of $57.27 (April low) and if breached a slide to the $51 region.
Consumer Discretionary Select Sector SPDR (ARCA:XLY) has been moving lower since mid-March and is currently testing that trendline. A daily close above $65 indicates short-term bottom is likely in place, and the price is likely to retest the $66.50 to $67.85 resistance area. Getting through that resistance area is going to be tough, but if it succeeds the multi-year uptrend will remain in place. A drop below the recent low at $61.84 though and the long-term uptrend is likely over, with the first downside target at $56.50.
Mohawk Industries (NYSE:MHK) broke above its short-term downward trendline on May 2 as the stock jumped 5.75%. The pop higher signals the price may be continuing its long-term advance following a multi-month pullback. Stops can be placed below either $135 or $132; placing it below $132 reduces the risk of being pre-maturely stopped out of a potential advance. Resistance is between $150 and $155.48, so exiting a portion of the position in this region is prudent. If the uptrend continues, the next target is $162.50.
The Bottom Line
Technology still looks fairly strong, but has given up ground to the Utilities, Energy and Consumer Staples sectors, showing investors are favoring less risky stocks at this time (and some commodities). That doesn't mean technology has reached a top though; it may continue to rise, but is not likely to outperform other sectors in the coming months. Consumer Discretionary (cyclicals) has seen a strong move down, but a break out of the large consolidation will tell in which direction the sector is likely to proceed over the next couple months. Each sector still has stocks that are performing well, and present trading opportunities. Going forward though it pays to be more selective in these sectors, trading only strong stocks and using stop loss orders to control risk in case of a turn.