While the broader stock market may have rebounded from Monday’s sell-off, the rally masked pain felt in several sectors.
Monday, the
S&P 500
fell 1.6% and, at its lowest, was down more than 3% below its all-time high. The index has rebounded rapidly, now less than 1% below its peak, and is far from correction territory, defined as a decline of 10% or more from a recent high.
But correction-type movements have occurred below the surface. As Wednesday’s trading approaches, 36% of S&P 500 stocks were trading above their 50-day moving averages, up from 91% in April, according to data from Truist. This suggests that the stock market has been correcting for the past few months, which is not immediately evident on a glance at the S&P 500, writes Keith Lerner, chief market strategist at Truist.
Some of the more economically sensitive sectors have been particularly weak, with financials, materials and energy as prominent examples. About 14% of S&P 500 financial stocks were trading above their 50-day moving averages before Wednesday, while 11% of materials and zero energy stocks were trading above that average. These are the three weakest sectors in the S&P 500 by this measure.
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The
SPDR S&P Bank Exchange Traded Fund
(ticker: KBE),
SPDR Materials Select Sector Fund
(XLB), and
SPDR Energy Select Sector Fund
(XLE) fell 15%, 10% and 16%, respectively, on Monday from their 2021 highs. The bank and energy funds were still in correction territory on Wednesday.
The withdrawals come as investors are increasingly concerned about the spread of Covid-19 Delta variants and signs of a spike in economic growth. But the spread of the variants seems unlikely to cause economic bottlenecks like those seen in 2020. What’s more, studies show that the vaccines are effective against the new variant. This could make financials, materials and energy stocks ripe for purchase. Truist calls these cyclical oversold stocks because less than 30% of the stocks in each of these groups are trading above their 50-day moving averages.
Others share the same sentiment. were going to come back [cyclical] ultimately trade because that’s where the fundamentals are, explains Jason Pride, director of private wealth investments at Glenmede.
This could be a reason to buy lower troubled cyclicals.
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