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S&P 500 Technical & Sector Outlook: XLRE & XLE in Focus

S&P 500 Technical & Sector Outlook: XLRE & XLE in Focus

Paul Robinson, Ryan Grace,

S&P 500 Technical & Sector Outlook

  • S&P 500, broader market strong at top of bullish channel
  • Real Estate (XLRE) chart suggests sector acceleration may be nearing
  • Energy (XLE) may be the best group for those looking to bet on stock weakness

Broader Market strong, at top of bullish channel

Turning to the technical posturing of the broader S&P 500, with it at record highs it is hard to argue that we are seeing anything but strength. However, that doesn’t mean we won’t see a pullback develop in the near-term. The pattern for months has been this – make new highs and shortly thereafter correct by a small amount.

Given that the SPX is situated near the upper bounds of a multi-month channel, the risk of seeing a small pullback is quickly rising. Trying to time and play the pullback in the broader market may be tricky in the absence of overtly bearish price action. Turning to the individual sectors may be the best way to play both continues strength and the possibility of a set-back.

S&P 500 Daily Chart

S&P 500 daily chart

SPX Chart by TradingView

Is Sector Performance Signaling A Growth Slowdown Ahead?

Sector Performance

When looking under the hood at sector performance to start the week, we’re seeing a bit of a reversal in last week’s out-performers. Growth oriented sectors such as Energy, Financials, Industrials, and Materials all pulled back Monday after rallying on the heels of Fed Chair Jerome Powell’s dovish stance at Jackson Hole.

With the S&P 500 hitting a new all-time high Monday, the Energy sector, as measured by the ETF, XLE, is our worst performer, correcting -1.21%, after notching a +7.7% gain last week. On the flipside Real Estate (XLRE) was best, increasing +1.17% Monday and adding to its bullish +10% performance on a trending 3-month basis. The XLRE is trading in a high and tight channeling pattern that suggests the sector may be about to see it accelerate higher.

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XLRE (Real Estate) Daily Chart

XLRE daily chart

XLRE Chart by TradingView

A daily or weekly move certainly isn’t a trend, but when we look out over slightly longer durations, we’ve seen relative outperformance in more defensive areas of the market since mid-summer. Namely, Real Estate (XLRE), Health Care (XLV), and Utilities (XLU). Not to mention, Technology (XLK) and Communications (XLC) which are heavily weighted in large mega-cap tech names such as Apple, Microsoft, Facebook, and Google. The latter are not traditionally associated with playing defensive, but they’ve certainly provided safe haven during recent bouts of COVID related economic anxiety.

So, what can we glean from analyzing sector performance as of late? Well, it appears to reflect somewhat cautious positioning around uncertainty related to the path forward for interest rates and a macroeconomic regime that’s arguably showing signs of trending inflation, coupled with marginally slower growth.

That being said, risk is always percolating under the surface, but from a sector perspective, we’re not seeing warning signs flashing at the moment. Additionally, should the market start to look past recent COVID related reopening headwinds, energy’s 1 and 3-month performance could likely get back into positive territory.

Picking on the weakest sectors may hold the best risk/reward if looking for a market setback. Energy stocks (XLE) may indeed firm up here if the market keeps powering higher, but until they prove themselves otherwise they remain trending lower since topping out in June.

As long as XLE stays below 50.57 the ETF remains vulnerable to selling despite having the 200-day just below. One could even make the case that the oil sector is in a broader topping process, dating to March, however; for the head-and-shoulders sequence to be validated the neckline needs to be broken down around the 45 level.

XLE (Energy) Daily Chart

XLE daily chart

XLE Chart by TradingView

Key Takeaways:

  • S&P 500 remains strong with good sector participation
  • Real Estate (XLRE) may be on the verge of accelerating higher
  • Energy (XLE) may be best postured for those looking to bet on stock weakness

Resources for Forex Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

---Written by Paul Robinson & Ryan Grace

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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