U.S. Sector Trend, Momentum, and Breadth Through October 2022

I want to preface this sector trends update with how we use it. We sometimes trade exchange-traded funds (ETFs) that aim to track an index, but we also have our own proprietary indices applying our ASYMMETRY^® methodology, as well as trading individual stocks for pure alpha without tracking an index at all.  I don't want to give the impression we only trend-follow sectors or market indices or even that we only follow trends because we also have countertrend systems. 

Our objective is asymmetric risk/reward for asymmetric investment returns; we are unconstrained as to strategy or market. 

A skillful trend follower wants to catch a trend early in its stage and capitalize on it until it ends, so if we want to identify them early, we must necessarily focus on short-term trends to see if they can become longer-term trends and asymmetric profits. 

With that said, we'll use Barchart to look at these sector trends. In the month of October 2022, eight of the eleven sectors tracked by S&P sector indices are in the green, and three are in the red. 

Despite the strong gains this month, looking at the S&P stock index and each sector year to date shows the damage from drawdowns for investors who dare to buy and hold stocks, stock funds, or stock index funds.

Even after the gains in October for the broad S&P 500 index, it's still down -19% year-to-date.

Here are the year-to-date sector losses. 

The only sector that's positive in 2022 is energy, and it's up 62%. Technology, Real Estate, Consumer Discretionary, and Communications are all down more than the broad index. 

Before taking a deep dive into the indices, here is our sector matrix showing recent absolute momentum and relative strength as of Friday, October 28, 2022. Some sectors have gained enough this month to also drive a positive return over three months. 

Now, let's dig in and look inside these sectors for trends and momentum. 

Let's start with an observation of the sector weighting of the S&P 500 stock index. Clearly, technology gets far more exposure than basic materials. 

First up is the technology sector, which S&P gives the most exposure to the S&P 500 index at 26% of the allocation, so it's the biggest return driver. 

During the month, the technology sector has closed above its 50-day moving average for the first time since August but is now stalling. The chart includes today, November 1st since the move today is making the signal questionable. You can see how the blue line (50-day average) looks to have some resistance to staying above it. 

Trend-following systems that aim to enter a breakout of the 50-day moving average may have entered the technology sector after it closed above the 50-day average. The risk of trend-following signals is they may fail and result in a whipsaw, so you enter the breakout, then end up exiting if the trend doesn't continue. 

Looking inside the technology sector, we focus on the percentage of stocks trending up, which gives us an observation of the breadth of participation in the uptrend. So the index of stocks itself has closed above its 50-day average, but we also see 67% of the stocks in the tech sector index are also trending above their own 50-day average. 

As you look at the table below, notice an increasingly higher percentage of stocks are above their shorter-term moving average, but a lesser percentage is above the longer average price. That's because before a price trend can trend above its 50-day, it first needs to trend above its 20-day, etc.  

You can probably see how shorter time frames may help with the objective of "identifying trends early in the stage", but don't think it's so simple. Trends don't always continue, or the shorter the time frame, the more whipsaws. 

A whipsaw occurs when you enter a position, and maybe it trends up, but you end up exiting with a loss as it ultimately trends down. 

Below I have charted the percentage of technology stocks in our index that is above their 50-day average. As of today, 60% of stocks are above their 50-day average, signaling a short-term uptrend, which tells us there is broad participation in the uptrend so far. You can probably see how that's good for both the index of stocks as well as the 60% of stocks that are now in uptrends, but I noted it was 67% on Friday, so we may already be seeing a shift. You may also notice the chart cycles from high to low and often peaks around 70% up to 90%, so another way we view it is once most stocks are already in an uptrend, they may have made their move. Eventually, this does play out, and the stocks start trending down again, as evidenced by the chart. 

Before we move on, notice too the chart signaled the bottom in March 2020 and June 2022 as less than 5% of stocks were holding up, so I consider the market washed out. 

As we go forward, keep in mind, a trend-following system aims to identify a trend early in its stage and capitalize on the trend until it changes. How early? is determined by the time frame. If we want to enter a trend really early, we use shorter time frames, which results in more trading and more small losses in an attempt to catch a longer trend resulting in a capital gain before it changes. 

Now that you get the picture, I'll move faster from here as we look at the remaining sectors. 

Consumer Discretionary is the second largest exposure in the S&P 500 index, and it's down -30% so far in 2022. As you can see below, the S&P Consumer Discretionary index remains below the 50 and 200-day averages, but it's also forming a double-bottom chart pattern. 

A trend follower would be short or out of the Consumer Discretionary sector, not long.

Looking inside at the breadth of participation in the Consumer Discretionary sector trend, 64% of the stocks in the index are trending above their shorter-term 50-day average price, but only 34% are above the longer-term 200-day trend following indicator.  

Percentage of S&P 500 Consumer Discretionary Stocks Above Moving Average

You can probably see how we may use a trend-following signal to determine when to buy or sell an index-tracking ETF, but when the index itself isn't generating a buy signal, more than half the stocks inside may be. 

It's also a good example of how we may go short an index ETF designed to track the index and long the stocks that are trending up. Such exposure would give the tactical trader the risk management of a hedge while investing in the leading stocks. We can take it even further to go long the uptrends and short the downtrends of the individual stocks. 

As we are a quantitative unconstrained investment manager with one of the longest-running track records trading sector ETFs with trend following, momentum, and countertrend systems, we have many weapons in our arsenal. Our quantitative capabilities also allow us to offer custom portfolios tailored to a client's objective. 

Consumer Staples has been one of the strongest relative strength sectors in 2022, but it's still down about 6% YTD. As you can see in the below price trend chart, the Consumer Staples sector index is above the 50-day by 2.4%, so it's in a short-term uptrend. Consumer Staples remains below its 200-day average. So, a shorter-term trend follower would likely be long Consumer Staples, but a longer-term trend-following system may be short below the 200 day. 

Looking inside the sector at the individual stocks in the Consumer Staples sector, about 79% of Consumer Staples stocks are above the 50-day, which is helping the basket (index) trend above the 50-day. Looking out further, however, fewer stocks are in longer-term uptrends. Consumer Staples is considered a more defensive sector, so it's no surprise to see it exhibit relative strength against other more cyclical sectors and tied to the economy. Consumer Staples stocks include household goods like Campbell Soup, General Mills, and other staples we tend to keep buying regardless of the economic cycle. 

Healthcare Sector stocks are another defensive sector since we all need healthcare regardless of the economic cycle. Overall, the chart shows a generally sideways volatile trend in 2022. However, the healthcare sector is trending above its 50 and 200-day averages. 

Looking inside the Healthcare Sector index at the stocks, 73% of them are in a short-term 50-day uptrend, so trend-following systems want exposure to healthcare stocks, but keep in mind the state of the trend is sideways and volatile, so whipsaws are a risk. 

Percentage of S&P 500 Health Care Stocks Above Moving Average

The Industrials Sector printed a lower low in the price trend, trended above the 50-day, and is now testing the 200-day moving average. It's a positive sign to see the cyclical Industrial sector trending up. 

Looking inside, 79% of Industrial stocks are in a short-term uptrend, and 50% are in a long-term uptrend. 

Percentage of S&P 500 Industrials Stocks Above Moving Average

The Financial Sector includes banks, brokers,  investment management, and insurance-type companies, and the chart pattern printed a lower low, a double bottom. It's 5% above the 50-day trend but below the longer-term trend signal. 

We could look inside to see that 70% of the stocks in the Financial sector are in short-term uptrends. 

Percentage of S&P 500 Financials Stocks Above Moving Average

The Basic Materials sector includes chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products, so it's connected to commodities. The Materials sector is now in a short-term uptrend, as identified by the 50-day average, but the chart pattern shows a downtrend of lower highs and lower lows. 

Looking inside the Materials sector at the stocks, 50% are in a short-term uptrend. 

Percentage of S&P 500 Materials Stocks Above Moving Average

So, it's no surprise to see some of the worst internal breadth, too. Only 12% of the stocks are in a longer-term uptrend. 

Percentage of S&P 500 Communication Services Stocks Above Moving Average

You can probably see why buying low can be advantageous when it increases future income. The following two sectors are some of my favorites to run a countertrend system because they generated the highest dividend yields, so as the price falls, their yield rises. For an extreme example, if a stock or ETF yields 3% at $100, if the price drops to $50, its yield would be about 6%.

Here's a visual representation of how the dividend yield (the purple line) interacts with the price trend (orange line), showing as the price falls, the yield from that price increases. The Utility sector yield recently was as high as 3.3% at lower prices this year. 

With that said, the Utility sector is in a downtrend as measured by the moving average trend signal, but the chart pattern shows higher highs but lower lows and the recent low undercut the prior low.  Utility stocks can be interest rate sensitive, so changing rates may explain some price action. 

Only 17% of the stocks in the index are trending above the 50-day average, so it was a potential "washed out" oversold signal. Here we show the percentage of Utility stocks above their 50-day moving average. This time, I've colored the chart to show a countertrend method when most of the stocks are already in downtrends, measured by fewer than 20% above their 50-day average price. I consider it oversold or washed out, and investors who wanted to sell have likely already sold, so we start looking for this signal to stop and reverse into an uptrend. I've had much debate with fellow trend-following hedge fund managers who dislike countertrend trading, but it may occur to you I called this a countertrend signal. Yet, I said, "we start looking for this signal to stop and reverse into an uptrend," which sounds like trend following. Countertrends refer to the inflection point when the trend rolls over to change direction from down to up or up to down, but once that's happened, it becomes a shorter-term trend following systems. So, there's that. 

The breadth percentages have been low, so it's an example of a sector that may have some stocks to identify trends early in the stage to see if it continues. 

Percentage of S&P 500 Utility Stocks Above Moving Average

Real Estate is another sector with a dividend yield. I'm more inclined to identify early uptrends as they reverse and trend up. The chart shows a downtrend of lower highs and lower lows, and the price trend is below the 50 and 200-day moving averages. 

But recently, we've seen some upside, and breadth has shown some improvement recently. 

Percentage of S&P 500 Real Estate Stocks Above Moving Average

I saved the best for last. 

The Energy sector has been firing on all cylinders for much of the year. Energy stocks are the only positive sector year to date, and the index is up 62% in 2022.

Breath of the Energy sector shows strong momentum and participation in the uptrend.  More than 90% of the stocks are in short and long-term uptrends. 

Percentage of S&P 500 Real Estate Stocks Above Moving Average

So, there we have it. 

Returning to our momentum matrix, we've seen some recent momentum, but longer-term trends are mostly down, and the primary trend is down for the stock market. 

Past performance is no guaranteed of future results, so directional trend systems and active risk management are essential. 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.