META, GOOG/L and NFLX continue to pace the sector, but there are some “green shoots” in other areas of the sector that together paint an encouraging picture.
Price Action & Performance
XLC broke out to new all-time highs in June though it didn’t quite keep pace with the S&P for the month. That said it scores highly in our Elev8 Sector Model on several inputs. Oscillator work has been positive with the index registering a short-term MACD buy signal at the end of June. Breadth measures remain strong with 72% of stocks in the sector above 50-day and 200-day moving averages.
At the industry level Interactive Media & Services have continued their torrid pace over the past 12 months while the Entertainment Industry and the Wireless industry (TMUS) have intact intermediate-term bullish performance trends.
On the bearish side there is a modest negative RSI momentum divergence showing up on the daily chart, but that by itself is not enough to cause alarm.
Economic and Policy Drivers
Alphabet Corp. (GOOG/L) and META are the two heavyweights in the sector. They are threatened somewhat by the prospect of rising rates, but more so by inflation manifesting high enough to raise recession probability which likely would cause correction as it historically coincides with major reductions in ad spending. So far in 2024 inflation has been dissipating and Fed. policy watchers have begun to discount a more dovish policy stance in the 2nd half of 2024. It will be important to monitor the consumer as that is one area where fundamentals have been deteriorating over the past few months. It’s one thing to talk about the CPI, but old and new media stocks that make up a broad swath of the Sector rely on advertising revenue. If the Consumer deteriorates any further, how long until the B2B space is impacted? That could end up a broad concern for internet adjacent stocks, however with mild inflation prints in sequential months, investors are starting to discount more dovish policy as the Fed’s priorities could potentially shift from vigilance on inflation to help for a flagging consumer. In the meantime, election year ad loads are historically a tailwind to media co.’s and lower rates in the near-term offer a respite from a potential headwind. We have increased our long position in the XLC to start July for these reasons.
How Can XLC Help?
The Communication Services Sector is a collection of somewhat odd bedfellows as GOOG and META and a few other internet technology companies were merged with legacy Telco’s, print media and television concerns as well as various other entertainment properties and DIS. XLC provides an easy one-click way to manage exposure to all those various business lines. GOOG remains one of the strongest charts in the S&P 500 and NFLX looks great too. META is at a potential pivot which will likely be resolved when they report earnings on 7/26. Meanwhile, with rates headed lower, the Sector includes VZ and T which have among the highest dividend yields in the S&P 500 universe.
In Conclusion
The XLC continues to benefit from the lack of inflation and the strong bull trend behind Growth stocks. Entering July we see a continued positive environment for the sector. The Elev8 Sector Model recommends an OVERWEIGHT position in XLC of +4.66% vs. the benchmark S&P 500 for July 2024.
Chart | XLC Technicals
- XLC 12-month, daily price (200-day m.a. | Relative to SPX)
- XLC remains in a strong uptrend. There are some mild negative divergences present in RSI (panel 3) and from Relative Strength, but the strong uptrend gets the benefit of the doubt for now and the macro environment remains supportive
Data sourced from Bloomberg
