There is no denying the strength in cyclical sectors in 2021, with Energy registering a +39% return and others like Industrials and Materials handily outperforming the S&P 500. Balance that data with two sectors underperforming the S&P (Consumer Discretionary, Technology), and you can see how, broadly speaking, value stocks have been the strength over growth sectors.
I routinely track the top twenty ranked stocks in our StockCharts Large Cap SCTR rankings, which uses a proprietary technical model to rank order stocks based on the strength of their trend characteristics.
Reviewing the current list, here are the sectors represented in the top twenty:
- Energy 8
Consumer Discretionary 5
Health Care 1
So 14 out of the top 20 are in the cyclical value-oriented sectors of Energy, Materials, Financials and Industrials. This certainly makes sense, given the performance of these sectors and the strong uptrend represented by some of these stocks. For example, let’s look at the top-ranked stock, Nucor Corp (NUE).
I’m struck by the consistency of this uptrend, with the price moving higher in a stepwise motion of quick rallies then consolidation periods. Most recently, NUE gapped up to around $84 in late March, then spent about three weeks in a basing pattern as it digested those recent gains.
Then going into late April, the uptrend resumed with the stock now testing the resistance level of $100. Stocks often pull back from big round numbers like $100, as investors tend to use that as an opportunity to reflect on the trends that have pushed the price to that level.
Nucor recently hit the extreme overbought condition where the RSI reached above the 80 level. We’ve often referred to that as the “good overbought” as the extreme upside momentum speaks to underlying buying power and a high likelihood of further upside follow-through. The energy stocks on this top twenty list all have similar price characteristics, with Devon Energy (DVN) perhaps a good example that is representative of the others.
The good news on this chart is that it has continued to make higher highs. It’s worth noting that some in this sector like FANG and MRO have not so yet! But with DVN it’s currently testing resistance around $26-27 after a rebound off an ascending 50-day moving average.
The challenge for this chart is the bearish momentum divergence. Price is going higher into May, but the most recent upswing has been met with lower momentum. That bearish momentum divergence is reminiscent of a similar pattern from semiconductor stocks in February, or even the S&P 500 chart in recent weeks!
The real key for energy stocks is holding support on pullbacks. So for DVN that means finding support at the 50-day moving average and below that the April low around $20. As long as that level holds on any pullback, the uptrend remains firmly in place!
For deeper dives into market awareness, investor psychology and routines, check out my YouTube channel!
PS- Ready to upgrade your investment process? Check out my free course on behavioral investing!
David Keller, CMT
Chief Market Strategist
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He is a Past President of the Chartered Market Technician (CMT) Association and currently serves on the CMT Curriculum and Test Committee. David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York. You can follow his thinking at MarketMisbehavior.com, where he explores the relationship between behavioral psychology and the financial markets.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.