The State Street Communication Services Select Sector SPDR ETF (XLC) has quietly been building a bullish formation over the past two months, as is clear on the chart below. A decisive breakout above the neckline of this inverse head-and-shoulders pattern would imply upside potential above the prior all-time high that was set in mid-September. While the bullish set up is clear, what has been less understood is how XLC arrived at this setup, and what must occur for a breakout to actually materialize. First, let’s consider the significance of the communication services sector overall. It represents approximately 10.5% of the S & P 500 , tying it with consumer discretionary as the third-largest sector, behind financials at 13.6% and technology , which dominates at roughly 34%. Despite its sizable index weight, communication services is a highly concentrated sector, with just 23 constituents, the second fewest among the 11 S & P 500 sectors—behind only energy , which has 22. This means the sector is heavily influenced by a small group of mega-cap stocks. In fact, Alphabet (GOOGL and GOOG) , Meta Platforms (META), Netflix (NFLX), and Disney (DIS) together account for nearly 40% of the XLC ETF. The implication is straightforward: when these stocks perform well, XLC tends to follow. Alphabet’s strong advance earlier this year was a major tailwind for XLC, though that leadership has faded in recent weeks. Meta, Netflix, and Disney have not contributed that much to sector performance lately either. This dynamic is clearly visible in the charts, which capture price action since September. Two key takeaways emerge. First, other holdings must have been performing well recently to lift XLC back toward its highs despite lagging mega-cap leadership. Second, if these heavyweight stocks reassert leadership, XLC could receive an even more powerful upside boost, and, indeed, break out. So what, exactly, has been driving XLC’s recent strength? These four stocks specifically— TKO Group (TKO) , Fox Corp. (FOXA) , Warner Bros. Discovery (WBD) and Comcast (CMCSA) . As the charts make clear, each of these has been making higher highs and higher lows over the past several weeks and months. Thus, the collective strength of these four (and some others) has played a meaningful role in lifting XLC back toward its prior highs and is a key reason the ETF now sits on the doorstep of a potential breakout. The best-case scenario, of course, is a broad, coordinated advance across the majority of XLC’s names. Strong participation clearly would not only support a short-term breakout but also increase the odds of a sustained move to new highs. And that could mimic the powerful follow-through we’ve seen after other major weekly pattern breakouts over the past three years. For any of this to materialize soon, however, XLC must first bust above that key 118 level. A successful push through that zone would increase the odds that the current, short-term setup is evolving into something more substantial. DISCLOSURES: Frank Cappelleri owns GOOGL. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
