Market Trends: Growth Sectors Outperform as Economy Expands

Recent Economic Data Points to Continued Expansion

The latest economic data released this week has painted a picture of an economy that continues to expand, albeit at a moderate pace. This has had significant implications for the financial markets, with certain sectors showing notable outperformance.

Employment Data Remains Solid

One of the key data points released was the employment report, which showed:

• A solid gain in non-farm payrolls
• A gradually rising unemployment rate

This combination suggests that while job growth continues, it is not at a pace that would spark concerns about overheating or rapid inflation.

Inflation Expectations Moderate

The employment data, coupled with other economic indicators, has led to expectations that inflationary pressures will moderate over time. This outlook has important implications for monetary policy.

Rate Cut Expectations Return

With the economic data coming in as it has, traders have once again begun pricing in the possibility of an interest rate cut by the Federal Reserve in December. This shift in expectations has been a key driver of market sentiment.

Consumer Sentiment Improves

Another positive sign for the economy came in the form of improved consumer sentiment in December. This aligns with strong earnings reports from major retailers like Amazon, which reported a robust start to the holiday shopping season.

Market Performance Overview

The economic backdrop described above has led to some clear trends in market performance:

S&P 500 Performance

The S&P 500 index has shown steady performance, with the following characteristics:

• Repeatedly hitting new daily highs
• Tight trading range
• Positive RSI (Relative Strength Index)
• Positive MACD (Moving Average Convergence Divergence)

These technical indicators suggest that the near-term uptrend remains firmly in place for the broader market.

NASDAQ Outperformance

While the S&P 500 has performed well, the real star of the show has been the NASDAQ Composite:

• Up 3% for the week
• Hit a new high in price
• Positive RSI and MACD

The outperformance of the NASDAQ is indicative of the strength in growth and technology sectors.

Sector Performance Analysis

A closer look at individual sectors reveals some clear winners and losers in the current market environment.

Growth Sectors Lead the Way

The top-performing sectors have been those associated with growth:

1. Consumer Discretionary (XLY)

   • Major contributors: Amazon and Tesla
   • Benefiting from strong consumer sentiment and holiday shopping

2. Communication Services

   • Standout performers: Netflix and other internet-related stocks
   • Reaching new highs

3. Technology

   • Overcame volatility from November
   • Gapped up into a base breakout
   • Holding gains firmly

Struggling Sectors

On the flip side, several sectors have shown weakness:

1. Utilities

   • Down 4% for the week
   • Failed attempt at a new uptrend
   • Now back in a downtrend with negative RSI

2. Healthcare

   • Continuing to struggle
   • Failed to complete a V-shaped recovery
   • Underperformed for the week

3. Basic Materials

   • Gold stocks pulled back
   • Other materials that had been moving higher also retreated

4. Energy

   • Giving back gains made in November
   • Affected by dropping oil prices

5. Industrials

   • Pulled back this week

Equal-Weighted vs. Cap-Weighted Performance

An interesting divergence has emerged between the cap-weighted S&P 500 and its equal-weighted counterpart:

• The cap-weighted S&P 500 showed overall gains
• The equal-weighted S&P 500 pulled back

This discrepancy highlights that the rally was not broad-based, but rather concentrated in certain large-cap stocks, particularly in the growth and technology sectors.

ETF Performance and Trends

Examining the performance of various ETFs provides further insight into market trends and opportunities for investors.

Software Stocks Lead the Charge

Software-focused ETFs have shown remarkable strength:

• Up 5% for the week
• Gapped up on Wednesday into a nice uptrend
• High volume on the gap up
• Hitting new highs

This performance was bolstered by strong earnings reports from well-known software companies.

Retail Shows Relative Strength

The S&P 500 Retail ETF (XRT) has also demonstrated outperformance:

• Up slightly less than 1% for the week
• More base-building than a significant move higher
• Showing relative outperformance compared to other sectors

Mixed Performance in Other Areas

Other ETFs and sectors showed more mixed or negative performance:

• Banking (KRE): Pulled back during the week
• Biotech: Continuing to struggle after a significant decline, though some base-building is occurring
• Semiconductors: A segregated market with some ETFs (like SMH) showing more strength due to higher weightings in AI-related stocks
• Housing: Significant pullback with negative RSI and MACD poised for a bearish crossover

ARK Invest Funds: A Resurgence of Innovation

One of the most notable trends in recent market action has been the strong performance of ARK Invest funds, managed by Cathie Wood. These funds, which focus on innovative and disruptive companies, had fallen out of favor but are now showing significant bullish price action.

ARKW: Next Generation Internet ETF

The ARKW fund, focused on next-generation internet companies, has been a standout performer:

• Strong post-election gap up
• Continuation rally
• Overbought RSI (near 84)
• High volume on recent advance

Top holdings in ARKW include:

1. Tesla (TSLA)
   • Base breakout on analyst upgrade
2. Coinbase (COIN)
   • Breakout from base
   • New uptrend indicated
3. Roku (ROKU)
   • Gap up into base breakout
   • Strong volume
   • Positive MACD
4. Robinhood (HOOD)
   • Trending upward despite overbought RSI
5. Square (SQ)
   • Base breakout following earnings
6. Palantir (PLTR)
   • Gap up on earnings
   • Significant uptrend continuation

ARKF: Fintech Innovation ETF

The ARKF fund, focusing on financial technology companies, has also shown strength. Top holdings include:

1. Coinbase (COIN)
2. Shopify (SHOP)
   • Huge gap up on earnings
   • Forming new base
3. Square (SQ)
4. Robinhood (HOOD)
5. SoFi Technologies (SOFI)
   • Sharp advance
6. Palantir (PLTR)

ARKQ: Autonomous Technology & Robotics ETF

The ARKQ fund, which focuses on robotics and industrial innovation, has also been performing well. Notable holdings include:

1. Rocket Lab (RKLB)
   • Innovative satellite company
2. Tesla (TSLA)
3. Palantir (PLTR)
4. Kratos Defense & Security Solutions (KTOS)
   • Defense-related stock showing strength

Trading Strategies and Considerations

Given the current market dynamics, there are several strategies and considerations for investors to keep in mind.

Buying on Pullbacks

One strategy to consider is buying on pullbacks for stocks that have shown strength but may be experiencing a temporary retreat. Key things to look for include:

1. A move back above the 50-day simple moving average
2. Base breakouts on high volume
3. Positive shifts in technical indicators like RSI and MACD

Downtrend Reversal Candidates

When looking for stocks that may be reversing a downtrend, consider the following criteria:

1. Price moving back above short-term moving averages (10-day, 21-day, 50-day)
2. RSI moving into positive territory
3. MACD showing a bullish crossover

Sector Strength Consideration

It's crucial to consider the overall sector strength when evaluating individual stocks. For example, even if a stock like Merck (MRK) shows some signs of a potential reversal, the weakness in the broader healthcare sector may limit its upside potential.

Earnings Estimate Revisions

Pay attention to analyst revisions of earnings estimates. Sectors or companies facing downward revisions may face headwinds, even if their charts show some positive technical signals.

Looking Ahead: Key Economic Data and Earnings Reports

As we look to the week ahead, there are several important economic data releases and earnings reports to watch:

Inflation Data

• CPI (Consumer Price Index) report
• PPI (Producer Price Index) report

While inflation data has lost some of its market-moving power recently, these reports could still impact market sentiment and Fed rate expectations.

Earnings Reports

Several significant companies are set to report earnings, including:

• PayPal
• Square

These reports, particularly in the fintech sector, could provide further insight into consumer spending trends and the health of the digital payments ecosystem.

Conclusion

The current market environment is characterized by a clear divergence between growth-oriented sectors and more defensive or cyclical areas. Technology, consumer discretionary, and innovative companies are leading the charge, while sectors like utilities, healthcare, and energy are lagging.

Investors should remain mindful of these trends and consider focusing on areas of the market showing relative strength. The resurgence of ARK Invest funds and other growth-oriented ETFs may present opportunities, but it's important to be aware of overbought conditions and the potential for pullbacks.

As always, it's crucial to maintain a diversified portfolio and to align investment decisions with individual risk tolerance and long-term financial goals. Keep an eye on upcoming economic data and earnings reports, as these could provide further clues about the direction of the market in the coming weeks and months.

Remember that while the current trends favor growth and innovation, market dynamics can shift quickly. Stay informed, remain flexible in your approach, and be prepared to adjust your strategy as new information and market conditions emerge.

Article created from: https://youtu.be/P8UdKaJB4QQ?feature=shared