Communication Services Sector Trading Strategy (Backtest And Example)

Last Updated on October 14, 2022

The communication services sector has seen stable long-term growth, as electronic communication has now become an essential part of life for people and businesses.

In this article, we discuss what the communication sector is and we try to develop a communication sector trading strategy. Unfortunately, the sector is difficult to trade because it consists of very different types of stocks. The equity curves further down confirm that!

What is the S&P Communication Services sector?

The S&P 500 Communication Services sector consists of those companies included in the S&P 500 that are classified as members of the GICS Communication Services sector. Companies in this sector are involved in businesses that make communication possible — either through the internet, phone, airwaves, cables, wired, or wireless. These businesses provide the infrastructure to transmit information in audio, texts, voice, and video. Sub-sectors in this sector are telephone, cable, and internet service providers.

The ETFs that track the sector include Vanguard Communication Services ETF (VOX) and Communication Services Select Sector SPDR Fund (XLC). And from their performance, the sector has made an average return of 11.8% per year over five years.

XLC has the most volume, but it started trading as late as the summer of 2018 so its history is short. Thus, in this article, we backtest the ETF with the ticker code VOX (average volume of almost one million shares per day).

What are the 5 biggest stocks in the sector?

The 5 of the biggest telecommunication stocks in the S&P 500 index include:

Alphabet Inc. (GOOGL) and (GOOG): This is the parent company for Google, the communication services giant that provides various products and platforms for information and communication, including Android, Chrome, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. It is also involved in the sale of apps and in-app purchases and digital content in the Google Play store, as well as Fitbit wearable devices, Google Nest home products, and cloud services. Alphabet Inc.’s class A (GOOGL) and class C (GOOG) stock prices have a total market cap of about $1.47T as of July 2022 with a year-to-date return of 23.15% and 22.47% respectively.

Meta Platforms Inc. (META): Meta Platforms, formerly known as Facebook Inc owns communication and information sharing platforms, such as Instagram, Facebook, and WhatsApp. Meta generated about 97.5% of its revenue from advertisement offerings to marketers. Its stock outperformed the broader market, with a year-to-date return of 50.40%. Its total market capitalization is $495.66B as of July 2022.

Verizon Communications Inc. (VZ): The company’s mobile network, Verizon is the largest wireless carrier in the United States, with over 120 million subscribers. Despite suffering a crash in its stock price; Verizon has been on a price recovery since May 2022 with a year-to-date return fairly above 3% and a total market capitalization of around $212.908B.

Comcast Corporation (CMCSA): Comcast Corporation is the second largest cable television and cable broadcasting in the world by revenue. Its products offering include telephone service, internet service, cable television, and pay TV. The telecommunication giant has been on a downward movement since August 2021, and it currently has a total market cap of $183.67B as of July 2022.

AT&T Inc. (T): The company provides telecommunications, media, and technical services worldwide. It offers wireless voice and data communications services and sells handsets, wireless data cards, and wireless computing devices. It also provides data, voice, security, cloud solutions, outsourcing, and managed and professional services, as well as customer premises equipment for multinational corporations, small and mid-sized businesses, government agencies, and wholesale customers. As of July 2022, its market cap is $146.616 billion.

The sector has both “high flyers” (GOOG, META) and “boring stocks (T, VZ, CMCSA). Also please keep in mind that the components might change in the future. Indices and ETFs are regularly rebalanced and change both weightings and components.

Communication services sector trading strategy (VOX and XLC trading strategy)

Because the sector consists of different types of stocks, it’s not the easiest sector to build trading strategies in. For example, CMCSA and VZ move frequently differently than META and GOOG.

Anyway, let’s backtest the sector to see if we can use any communication services trading strategy. Because the ETF with the ticker code VOX has a much longer history, we use that one for our backtests in this article.

We went through all of our monthly trading edges meant for QQQ and/or SPY, but with no success.

Here is an example – below is the equity curve for the monthly trading edge of February 2022:

Obviously, this is not a strategy you’d like to trade!

Let’s additionally show the equity curve for our March 2022 monthly trading edge which is an overnight strategy:

Other sector trading strategies

We have covered all the different subsectors in the S&P 500:

• Sector trading strategy (backtest and example)
• Industrials Sector Trading Strategy (Backtest And Example)
• Real Estate Sector Trading Strategy (Backtests And Examples)
• Consumer Discretionary Sector Trading Strategy (Backtest and example)
• Financial Services Sector Trading Strategy (Backtest And Example)
• Technology Sector Trading Strategy (Backtest And Example)
• Materials Sector Trading Strategy (Backtest And Example)
• Healthcare Sector Trading Strategy (Example And Backtest)
• Energy Sector Trading Strategy (Backtest And Example)
• Biotech trading strategy (backtest and example)
• Homebuilder trading strategy (Backtest and example)

Communication sector trading strategy – ending remarks

All sectors are certainly not created equal, and the communication sector is one of those that are rather different compared to the overall market (S&P 500 and Nasdaq). That is mainly good, but only if you are able to find any reasonably good trading strategies that offer good diversification. Unfortunately, we have never had much success in finding any communication sector trading strategy.