(Premium) Communication Services Sector Deep Dive
The Communication Services sector has made us wary for quite some time now.
The primary source of our concern has been the weakness below the surface. Even though the sector has been a huge outperformer all year – its 39% gain lags only the 42% rise for Information Technology – most stocks in the sector just aren’t doing that well.
Check out the equally weighted Communication Services ETF vs. the equally weighted S&P 500: you’ll find a ratio that’s meandering sideways after a steep, extended downdraft. This is not what internal relative strength looks like.
Our concerns led us to downgrade Communications to Underweight at the outset of August. In addition to weak internals, we saw potential for relative weakness in the cap weighted sector, too. What we saw was the ratio approaching a former area of support-turned-resistance, at the same time momentum was putting in a big bearish divergence.
We’ve been wrong before, and we’ll certainly be wrong again. We’re not yet sure whether we’re wrong this time.
What we do know is that Communication Services keeps hanging in there. Although the sector moved from the “Leading” quadrant of the Relative Rotation Graph to the “Weakening” quadrant in the early summer, things have turned back up in recent weeks.
Thank the everlasting strength of Alphabet for the sector’s resilience. It successfully held a breakout above $127 and set new one-year highs this week. There’s not much stopping the stock from challenging its all-time highs up at $150 – except for that pesky bearish momentum divergence. Remember, though, momentum divergences don’t mean a thing without price confirmation. Don’t fight the tape.
Less impactful, but equally impressive, has been Charter Communications completing a bearish to bullish reversal. It set higher lows, broke the downtrend line, and then got above the 200-day. It followed that performance up in August by breaking through former resistance from the January highs. We want to buy pullbacks toward $430 with a target of $500, but only if we’re still above that key level.
We’d like Charter even more if it can complete the bearish to bullish reversal on a relative basis, too. Momentum is in a bullish range for the first time in years – that’s not something you typically see in downtrends. Here’s the stock compared to the S&P 500 challenging a key rotational level.
Peer Comcast is a bit further along, recently breaking to new 52-week highs vs. the benchmark index. That gives us some confidence that Charter will follow suit.
The next big reversal could come from Disney. This has been an outright stinker for a couple years now, and it’s tough to see what the catalyst could be for a new uptrend. At the same time, we don’t want to ignore a potential bullish momentum divergence – especially since it’s happening at such an important level in the COVID lows.
The setup is pretty clean as far as we’re concerned. The path of least resistance for Disney is lower. BUT, if the buyers step in and push prices back above $85, we think that could spark a full-fledged trend reversal. We’d want to be long with an initial target of $110. Below $85, it’s a waste of time.
So what would make our relatively negative sector view turn out to be right? Weakness in those mega caps. What if Alphabet isn’t able to overcome that bearish momentum divergence we pointed out?
Then the stock is most likely putting in a failed breakout on a relative basis, too.
It would be tough for the sector to overcome weakness from its largest component.
Especially with its next largest similarly challenged. Meta definitely isn’t in a downtrend. But momentum failed to get overbought on the gap higher after earnings, which was a bit concerning, and now the stock is back below the breakout level.
We’ve said repeatedly that momentum divergences don’t mean anything without price confirmation (just look at the big divergence from earlier this year). In Meta, it looks like price confirmation is exactly what we got.
The post (Premium) Communication Services Sector Deep Dive first appeared on Grindstone Intelligence.