Sector Market Overview – Communications are Breaking Out and Poised to Trend Higher

The communication sector is heavily weighted by market titans like Alphabet and Facebook, which reported better than expected financial results in January and early February. Alphabet’s earnings showed that ads continue to drive market share. Historically, the communications sector has experienced mixed returns in February, following earnings results. Technically the index looks terrific, as it is breaking out and poised to test higher levels.

Key Earnings Drive Price Action

Alphabet helped drive the sector following better than expected Q4 earnings that surpassed analysts’ expectations. The company reported payments of $22.30 per share, versus expectations that the company would earn $15.90. Revenue came in at $56.90 billion, versus expectations of $53.13 billion. Ads drove revenue. YouTube ads came in at $6.89 billion, versus expectations of $6.11 billion.

Alphabet’s revenue grew 23% annually in the quarter compared to 17%, growth in the same period the prior year. The fourth quarter’s advertising revenue came out to $46.20 billion, up 22% from $37.93 billion in the same quarter last year.

The Seasonals are Mixed

Historically, the communication sector experienced mixed results in February. Over the past 10-years, the sector has increased 60% of the time for an average gain of 1.6%. During the past 5-years, the communications sector has declined 80% of the time for an average loss of 1.9%.

Technical Analysis

The SIXC tests the all-time highs forming a cup and handle pattern, which is a pause that refreshes higher. A close above 368, would signal that the index has broken out. Target resistance is seen near 378, which his the most extensive stretch between the 50-day moving average and the most recent high before the breakout. Support is seen near the 5-day moving average at 358 and then the 50-day moving average at 353.

Short-term momentum is positive as the fast stochastic has generated a crossover buy signal and is racing higher. The fast stochastic is fast approaching overbought territory, printing a reading of 79, just shy of the overbought trigger level of 80. Medium-term momentum is positive as the MACD (moving average convergence divergence) index has recently generated a crossover buy signal. The MACD histogram has also generated a crossover buy signal. The MACD histogram is printing in positive territory with an upward sloping trajectory, which points to higher prices. The relative strength index (RSI) has also rebounded sharply from lower levels, reflecting accelerating positive momentum.

The Bottom Line

The upshot is that the communication sector is poised to breakout. It has formed a cup and handle pattern, which is a pause that refreshes higher. A close above crucial resistance will lead to higher levels. While the seasonality of the returns on the index is mixed during February, Facebook and Alphabet’s strong earnings results point to robust returns in the communication space. Alphabet reported better than expected financial results on February 2 following the closing bell and buoyed the index.  Momentum is positive, and the technical outlook points to higher prices, especially on a breakout. Look for the price of the SIXC to continue to trend higher if it can close above the $368 level.