Is communication a sector to watch this year?

Julius de Kempenaer is the creator of relative rotation graphs (RRGs), as well as being the co-founder and director of RRG Research. In this excerpt from his latest article for Stockcharts.com, Julius explores two sectors worth considering in April.

The seasonal trends for sectors versus the S&P 500 going into April show many 50/50 odds for out- or underperformance. But the two sectors that stand out are interesting and important ones.

Seasonality for communication services shows that this sector outperformed 67% of the time in April and 75% in May. So, based on this seasonal trend, a good period for Communication Services may be expected.

Information Technology, on the other hand, shows outperformance 40% of the time, or, in other words, an underperformance 60% of the time.

What magnitude of over-/underperformance can be expected?

The table below shows the average relative return per sector versus the S&P 500.

For the Communication Services Select Sector SPDR Fund [XLC], that is an average of 0.9% outperformance over the SPDR S&P 500 ETF Trust [SPY]. For the Technology Select Sector SPDR Fund [XLK], that is a 0.4% underperformance versus SPY, which is in line with the figures from the first table.

Now how are these sectors currently rotating on the RRG?

The RRG above shows the rotation for XLC and XLK versus SPY over the last five weeks. The pattern could not be more clear. XLC is moving further into the leading quadrant, while XLK is pushing into lagging.

This rotation fully matches the seasonal expectations for these sectors.

For the full article, which includes a more detailed breakdown of the XLC and XLK, head over to Stockcharts.com, here.