Despite a market rally that brought the S&P 500 back into positive territory for the year, telecommunications services became the sixth of the 10 S&P 500 sectors to trigger a negative technical signal from Reality Shares Advisors' Guardian market-strength indicator (disclosure: I am CEO of Reality Shares). With a majority of sectors now trending below their long-term price averages and exhibiting heightened volatility compared to historical averages, the Guardian Indicator signals a negative technical trend for the overall market for only the third time in the last 15 years.
The Guardian Indicator measures a combination of price and volatility trends at the sector level to gauge the market's overall direction. The price-trend for telecommunications has been negative for most of 2015, briefly rebounding in the early summer before turning sharply into negative territory on July 8. When the sector's downward volatility trend exceeded its long-term average on Oct. 23, it met the other criterion for negative alert under the Guardian methodology.
Source: Reality Shares Research
Unlike the health care and technology sectors, which triggered bearish technical signals despite sound financials and favorable market trends, Telecommunications also lags behind on a fundamental basis. Revenue over the past year has declined more than 3% and earnings-per-share has declined more than 40% compared to the prior year according to Bloomberg and Fidelity data.
Telecommunications also has the lowest average DIVCON dividend health score of any sector, which reflects a combination of fundamental financial measures and consensus estimates. In fact, the sector's average dividend health score has been in the "Risky" category for more than a decade. That sentiment is reflected in the sector's forward price/earnings ratio, which stands at 12.2 compared to 15.7 for the S&P 500.
Source: Reality Shares Research
Among the four S&P 500 sectors that still earn a positive market strength signal, financial services retains the strongest Guardian Score, more than double that of consumer discretionary, industrials and materials, which remain at cautionary levels but aren't at imminent risk for a negative signal. If additional sectors turn negative, it could indicate a longer or more pronounced decline in the market. In the two most recent Guardian caution periods, beginning in 1999 and 2008, the markets experienced their largest downward swing between six and 12 months after the Guardian Indicator turned negative.
The Guardian Indicator is a tool that systematically assesses the direction of the market based on a combination of momentum and volatility technical factors. The process first measures the health of each S&P 500 sector individually using those factors. Our research indicates that once three of the 10 sectors are negative in our model, it signals a bearish technical trend for the market overall.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned. This article represents the opinion of Eric Ervin and may not represent the view of Reality Shares.