The charts below show the relative strength of the ten S&P 500 sectors as well as the Dow Jones Transports and the Russell 2000 relative to the S&P 500 over the last year. When the line is rising it indicates that the sector is outperforming the S&P 500, while a falling line indicates underperformance. We have also shaded each sector in red or green to indicate whether the sector has outperformed (green) or underperformed (red) the S&P 500 over the last year.
As shown in the top two charts, both consumer sectors have seen their relative strength trend lower in recent weeks. The recent performance of these two sectors has provided a mixed message. While the underperformance of a defensive sector like Consumer Staples is encouraging for the bulls, the underperformance of the more cyclical Consumer Discretionary sector is a negative divergence.
Staying on the theme of underperformance, we have also seen a notable decline in the relative strength of other notoriously defensive sectors. Health Care's relative performance has been notable over the last few months. While the sector outperformed leading up to the Supreme Court's ruling on the Affordable Care Act (Obamacare), its relative strength peaked within two weeks of the ruling on June 28th. Along with Health Care, other defensive sectors such as Telecom Services and Utilities have both seen sharp declines in their performance relative to the S&P 500.
On the positive side, bulls should be encouraged to see the relative strength of Industrials and Technology reverse higher in recent weeks. Even Financials have been getting in on the act, as the sector's relative strength has been drifting higher since making a low for the year back in late May.
Outside of the performance of individual sectors, we also included the relative strength of the DJ Transports and the Russell 2000 small cap index. During market rallies, many investors like to watch these sectors for confirmation of the rally. In the case of both of these sectors, the overall market rally started without them, and it wasn't until just recently that they started to join the party. Better late than never!
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