Tech and Consumer Discretionary sector rebalance, and what it means to you

September 26, 2018, 9 Comments

The S&P technology sector, as reflected in the SPDR ETF “XLK-US”, was overhauled this week. It no longer holds some big players like Facebook, Google, Twitter and Activision Blizzard. So too was the S&P Consumer Discretionary index (XLY-US) – it lost big players like Netflix, Comcast and Disney. All of these stocks are being shuffled into the S&P Communications Service sector index.  For those interested, Amazon (arguably the biggest and most dominantly trending player in the tech sector) is staying. The SPDR ETF for the Communications index is XLC-US.

 

One of our readers (a shoutout to Dale for asking on a comment entry) asked me to comment on these changes. Today,  I will highlight these dominant players, and what it might mean to the two indices. To jump to the conclusion before presenting the charts – my thoughts are that the changes might prove to improve the tech sector’s performance, and the Discretionary sectors outlook, going forward. The current technical profile of a number of these stocks may be a bit questionable as for their continuation of their former uptrends (if any). Lets get into a few of the charts to explore why I feel this way.

 

Tech changes

I didn’t take the time to reference the weighting within the index of these sectors prior to this week’s change – but I am sure you could find them if you spend a moment perusing the internet.

 

I can tell you that Google was likely the largest position within the group of stocks being punted from the sector. As you can see from the chart below, it’s been in a very nice uptrend. This loss negatively impacts the XLK ETF, and is likely bullish for the communications sector..

Activision is still in an uptrend, but it has been consolidating for most of this year. The loss of this stock form the tech index is probably a negative thing longer termed, but neutral for the time being.

Facebook, on the other hand, is showing the potential of topping. It has taken out its 200 day (40 week) SMA. Should the stock bust $150, I would think this would be a top. I wouldn’t want to own this stock until the possible topping formation proves incorrect – losing this stock from the index is probably bullish for XLK, and bearish for the communications sector.

Twitter looks to have broken out of a rounded bottom that formed between 2015 – 2018. But recently, it appears that the breakout is failing. I view the pattern as bearish, or neutral at the very best. Thus, losing this stock is likely a win for XLK, and a loss for the communications sector.

 

Consumer Discretionary changes

Netflix – After rising since 2016, this stock seems to be basing. The uptrend is not over, but it is certainly consolidating. I view this loss as neutral for the XLY, and the communications sector.

Comcast is rising, but the longer pattern is chaotic. Losing this stock from the tech index might be temporarily negative – but longer termed bullish for XLY. I view it as bearish for the communications sector in the longer run.

Since 2015, Disney has been a traders dream, and a buy/hold investors frustration. Right now it’s at the top of its trading range at near $115. Could it break out? Sure. But its tried doing so 5 times since 2015 with no success. I’d bet on the Toronto Maple Leafs winning the cup this season before betting DIS will be much higher than $115 at this time next year. But, then again, the Leafs did win the Cup in 1967 – so stranger things could happen. I was 5 years old when the Leafs last won – unaware of much television entertainment beyond what Fred Flintstone was up to. I’m sure my dad was excited, for the last time, about that Leaf win.

Perhaps we’ll watch The Mouse break out. But I won’t hold my breath. Bullish for XLY to lose The Mouse. Bearish for the Communications sector.

 

 

9 Comments

  • Looking at the holdings for XLC, I see those new companies plus the traditional telcoms, ie AT&T …

    Currently where are CDN traditional telcoms indexed?
    Is there a CDN version of Communication Services index?

    For example where is Bell Canada, Telus … indexed?
    Any CDN ETFs for this sector?

    Thanks

    Reply
  • I would of thought that a technician would be all over a stock like Disney (DIS) with its perfect Cup and Handle formation. The handle just formed and now it’s up up and away!

    Reply
    • David- read my book Sideways–it may offer some thoughts on identifying patterns like Cup and Handle… A cup and handle is usually formed at a bottom of a downtrend. DIS is in a sideways trading range–not a trend. Its been that way sine 2015. Support is $90-95, resistance is $115-120. That floor and ceiling is pretty firm – I would only buy if and when it either blows through $120 OR I would buy on a return and successful test of the $90-95 support zone.

      Reply
    • Yes, once some of the technicals improve on the stocks I note in the blog that are moving to it – they are good companies for the most part, just need a bit of a breather, and a new trajectory to add value to the sector–which I think in the long run will be a good place to be.

      Reply
  • These are changes/updates that should have been brought in way sooner. How can NFLX be classified in the same bucket as AMZN or Google just because it’s all online.

    Anyway, nice read and insight Keith, thanks

    Reply
    • Good question–although i think it was not so much a classification as it was an observation that it, and the other FANG’s were market leaders.

      Reply
  • Keith,

    If I talked about the current scenario, I believe the tech sector is really dominating the industry such as Google, Facebook & NTFX.

    Moreover, they have a very large impact on the trading sector and investors. Anyways, great insight!

    Thanks

    Reply

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