Stock sectors and relative strength: an analysis with monthly data

The analysis of relative strength on stock markets is a selection method that has always demonstrated a certain reliability in practice, also demonstrated by various academic studies. There are several ways to analyze relative strength. For my part, I use the Levy model, appropriately modified to study stock indices over the long term. One of the models I developed studies the monthly movements of the main American stock sectors, using the eleven main sectors replicated with Spider ETFs and the related S&P 500 index as a comparison benchmark.

The results are raw and unfiltered, but still give us an indication of the most interesting sectors to follow in a given period.

Since August 2018, the sector that has had the greatest relative strength on average has been the technology sector. But at the beginning of 2022, the energy sector began to dominate, mostly represented by companies working in the field of fossil energy.

In graph 1, the historical rankings of the two sectors covered by the article are represented. The higher the ranking number, the stronger that sector is compared to all others. We can see that over the last five months, the technology and energy sectors have alternated, with a predominance for the last three months of the energy sector.

Spider ETFs are related to the American stock market. To have a global vision we must move to the MSCI World indices. If we evaluate the relative strength of the MSCI World Energy index, compared to the MSCI World Technology index on a long-term chart, we can make a series of rather interesting considerations. In graph 2 we have the relative strength ratio in question, starting from 2007. We can see that the fossil energy sector ended up in a bear market in 2008. In 2020 we had a reversal of the trend, a breaking of an important resistance to beginning of 2022, and now we are in a consolidation zone.

In graph 3 we have the weekly price data of the MSCI World Energy index. We can see that since 2020 the index has been moving with higher lows. Starting from the third quarter of 2022, a symmetrical triangle was formed which was marginally broken by the last week's candle. The oscillators (Macd and RSI) are oriented upwards. However, there is a factor that indicates proceeding with a certain caution: the symmetrical triangle that has formed is excessively long, which denotes on the one hand a resilience of prices, but on the other a certain weakness in the directionality of the price.

In chart 4, if we look at the monthly data from 2018, we can see that the monthly candle that is forming is right astride the 12-month moving average. At the moment we are faced with a recovery movement in the trend after the fall in prices at the end of 2022. To confirm the caution expressed previously, we have the Macd which has been rather flat in recent months and which has yet to confirm a positive cross of the signal line. We will therefore have to check with the next monthly closings whether the relative strength will lead to an acceleration of price levels, or whether it is a consolidation in a broad lateral trend delimited by the two dotted red lines.

In summary, the current medium-term data of relative strength levels on equity sectors suggest to look at the technology and fossil energy sectors. This second sector experienced a long-term reversal in terms of relative strength in 2020. We must now evaluate, in terms of price, whether we will have significant performances or not compared to the other sectors. Even if the fossil energy sector is the furthest from ESG sustainability logics, we must remember that the transition to green energy will have to go through the use of dirty energy. Norway, for example, a country at the forefront of renewable energy, has its first source of wealth in oil and gas fields (14% of GDP and 40% of exports), which it does not intend to give up: as early as 2021 in the Labour-led four-year programme, there was no sign of a step back on controversial drilling in the Baltic. Norwegian politicians believe the industry needs to be given time to transform, and broadly agree that production should continue beyond 2050, arguing that the green transition will take time and that oil revenues can help finance it .

About the author

Mario Valentino Guffanti is a board member and Head of the Lugano Chapter. He is a financial advisor, technical analyst and researcher based in Milan, Italy. As an author of technical articles and lecturer as well as instructor in technical analysis courses in Switzerland, he is also dedicated to financial coaching through NLP techniques (neuro-linguistic programming).