The S&P 500 index (SPX) continued its plodding, deliberate move higher, closing a scant 0.05% above unchanged. The Nasdaq 100 (NDX) and the Dow Jones Industrial Average (DJX) did slightly better. Traders and investors looking for quick gains are having difficulty knowing where to look. Under such circumstances, a quick look at the market sector can prove instructive, since investors are likely turning toward sector-rotation strategies when the market starts to move more slowly.
The chart below shows the lead amassed by the technology sector, as tracked by iShares' sector-tracking SPDR ETFs for basic materials (XLB), energy (XLE), financials (XLF), industrials (XLI), technology (XLK), consumer staples (XLP), utilities (XLU), health care (XLV), and consumer discretionary (XLY). Some studies suggest that the best gains are to be had in the second place and second-to-last place sectors. The studies suggest that stocks in these sectors are more likely than others to be in a fast-growing sector 90-days from now. With this in mind, taking a closer look at the financial sector and the consumer discretionary sector might be worthwhile.
The Discretionary Sector Could Break Out
When a particular sector is relatively undervalued compared to its peers, it is also interesting to find a particular price pattern apparent on its chart. Price patterns may not have much in the way of predictive value, but they do indicate a price dynamic that can become a contributing factor should institutional investors take action on the sector.
The chart below shows a pennant pattern that has formed on XLY. This pattern sets up the possibility that a small change in price (higher) will grab attention from technical traders and institutional investors alike. This added attention could contribute to an unusual pace of appreciation should the market continue higher.
A Change in the Stream
The battle for dominance in streaming entertainment may take an interesting turn. The Walt Disney Company's (DIS) new Disney Plus service was apparently underwhelming to many early adopters, but this only served to generate headlines to many who were unaware that it had launched (or that it existed). Meanwhile, the added attention has led some analysts to increase their estimates for Disney, and by extension, Netflix, Inc. (NFLX) as well.
An interesting comparison shapes up if you overlay a chart of one portfolio composed of half Amazon.com, Inc. (AMZN) and half Comcast Corporation (CMCSA) with another portfolio of 50% Disney and 50% Netflix. Just this past week, the Disney-Netflix duo has overtaken the other portfolio for the year's performance. A continued rise by these stocks would go a long way to accelerate the discretionary sector.
The Bottom Line
While major market indexes traded to another record-high close, they did so very quietly. Under such circumstances, it isn't surprising to find opportunities in a sector comparison chart. As it happens, the consumer discretionary sector may be setting up to break out of its consolidating price pattern and make a significant acceleration. Disney and Netflix may contribute to such a move, as both have risen rapidly in the past week.
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