Trading relativity
02/20/19

●Is the communication services sector poised to benefit from sector rotation?

●Verizon (VZ) recently bounced off longstanding support level

●Increased institutional buying of VZ in second half of 2018


 

There are many players in the market, ranging from huge investment banks and hedge funds to individual traders, and they’re often working on different time horizons with different goals—which is one of the reasons market sectors continually fall in and out of favor. There’s a lot of money that needs to move around, and when, say, Pension Fund A cashes out its position in Sector X, it may move proceeds into Sector Y.

Then there’s the well-known phenomenon of “defensive” rotation. Traders who monitor sector relative strength are used to seeing, say, the utility sector jump to the top of the rankings when the broad market is selling off, and then just as quickly slide back toward the bottom when fear subsides. (By the way, that doesn’t necessarily mean utilities were up when they topped the sector rankings; they could have been down with the rest of the market, just down less.)

But there’s also the type of rotation that occurs more continuously, at the next level of market action. Last week, for example, energy and materials were two of the top three sectors, while the previous week they were in the bottom three. And fun fact: Energy has flipped from being the weakest sector to the strongest sector every week since January 25.

One of the three weakest S&P 500 (SPX) sectors last week was communication services. Year-to-date, it’s on par with the SPX—both have returns in the +10.5% range—but that nonetheless puts it sixth place out of 11. It’s too early to know if communications services, which includes some of the best-known and active stocks among traders (NFLX, FB, GOOGL, TWTR, to name a few), will reverse that weakness in the next week or two, but around 1 p.m. ET yesterday, it was the fourth-strongest sector and was up more than twice as much as the SPX. (Earlier in the trading session, when the SPX was in negative territory, it was the second-strongest sector.)

Verizon (VZ), 7/26/18–2/19/19. Verizon (VZ) price chart. One-day upside breakout.

Source: Power E*TRADE


Traders who are expecting the communication services sector to rotate higher in the near term may be looking for favorable conditions in specific component stocks. For example, the chart above shows Verizon (VZ), which bounced off a conspicuous support level at the end of January, rallied 2.1% on Friday to end last week near the top of its recent congestion pattern. Yesterday’s rally pushed it out of the top of that consolidation.

The scenario bulls could be considering is a stock in a possible upside breakout supported by the tailwinds of a potential short-term rebound in its sector. Verizon is one of the heavy hitters in the sector—a high-volume stock that has outperformed its sector by about nine percentage points since last September despite lagging in recent weeks.

Also, VZ institutional activity in Q3 and Q4 2018 was the highest it’s been in three years, with buying outpacing selling by more than two to one.1

While the action of institutional investors isn’t necessarily relevant to short-term strategy, it can sometimes give traders a broader perspective of market dynamics. All things considered, most traders would prefer to swim with the tide rather than against it.

Market Mover Update: April crude oil futures (CLJ9) closed above $56/barrel for a second-straight day on Tuesday. Netflix (NFLX) kept pushing out of the top of its recent congestion, while iQiyi (IQ) posted its sixth up day out of the past seven.

Today’s numbers (all times ET): Housing Market Index (10 a.m.).

Today’s earnings include: ArchRock (AROC), Analog Devices (ADI), Cronos Group (CRON), CVS Health (CVS), Intelsat (I), Owens Corning (OC), Weibo (WB), Agilent (A), Albemarle (ALB), Cheesecake Factory (CAKE), Esperion Therapeutics (ESPR), GoDaddy (GDDY), Netease (NTES), Tenaris (TS), WPX Energy (WPX).

 

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1 MarketBeat.com. NYSE: VZ-Verizon Communications Institutional Ownership. 2/19/19.