(Premium) Communication Services: What’s Not to Like?

There are two ways to work off a momentum divergence. Through corrective price action or through time.

Last month, we wrote this about Communication Services:

Communications relative to the S&P 500 is running into resistance from last April’s lows. On its most recent attempt move higher, RSI set a much lower high. After outperforming the S&P 500 by more than 18% since the November lows, this is a pretty logical place for the sector to take a breather.

Communication Services indeed took a breather, but it worked off that bearish momentum divergence with time, not price. Yesterday, the sector broke out to 9-month relative highs. What’s not to like?

The sector’s largest component, Alphabet, took some time to absorb overhead supply as well. Last fall, GOOGL found support at the September 2020 highs (which we’ve covered extensively in these letters as a significant turning point for Growth vs. Value). That was the ceiling since last fall’s breakdown and we pointed to that resistance as a big reason to take a wait and see approach on the sector. We waited. Now we’re seeing. GOOGL broke out yesterday. We like it long above $110 with a target back at the former highs near $150.

Omnicom is one that’s already near all-time highs. It’s pulled back toward our $85 risk level that we first laid out in our February note, giving us another entry opportunity. We still like it long with a target of $108.

Meta has been the juggernaut of the sector. It blew right past the resistance level that we pointed out last month. Can Meta keep up this torrid pace? Probably not. Do we want to be standing in front of a freight train? Definitely not. We’ll be looking to get long Meta on any pullbacks to $220 with a target near $300. We need to be a bit wary, though, given the stock’s history of big gaps. The story and risk could change rather quickly.

Speaking of freight trains, how about Dish Network? Maybe freight train is the wrong term. Falling knife? Waterfall? Dumpster fire? Whatever you won’t to call it, it’s not something we want to be buying when the rest of the sector is breaking out to new highs.

The same goes for Match Group. Since that failed breakout back in 2021, the stock has dropped more than 80%. Now it’s at 5 year lows. Is it possible that we get another failed move here, spurring a bearish to bullish trend reversal? Absolutely. Is that the higher probability outcome? No. Match Group isn’t ‘due for a hit’ just because they’ve struck out 12 times in a row.

The post (Premium) Communication Services: What’s Not to Like? first appeared on Grindstone Intelligence.