Sunday, July 14, 2013

Red-Hot Summer Sectors

by Tom Aspray

The stock market’s rally from the late June lows has been impressive as some of the hottest sectors have gained 7-8% in just the past nine trading days. In many years this would be a respectable annual return as the 10-year average annual return for the S&P 500 through 2012 was just 7.1%.

By using the monthly, weekly, and daily relative performance analysis (Spot Market Leaders in Any Time Frame) you can often identify those sectors that are leading the market higher. This allows you to concentrate on stocks or ETFs in those sectors that are outperforming the overall market.

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The table above lists the 1st quarter, 2nd quarter, year-to-date, and July ‘s performance for the nine Select Sector SPDR funds and the Spyder Trust (SPY).Three are up over 20% so far this year, well ahead of the 15.1% gain in the SPY.

The Materials Select SPDR (XLB) has done the worst, up just 5.3%, followed by the 8.0% gain in the Utilities Select Spyder (XLU). This performance does not include dividends, and if you add them in for the XLU, it is up over 9.2% so far in 2013.

The ETFs that are clearly leading the pack, so far in July (through 7/9), are the Financial Select Spyder (XLF), which is up 3.6% and the Consumer Discretionary Select Spyder (XLY), up 3.8%. All of the Select Spyder ETFs are higher so far this month.

Sector selection was again important in the second quarter as energy was up 11%, while the utilities were down 3.8%, and materials lost 2.1%.

So which of the sector ETFs look the best in the coming months?

As I discussed earlier this month, the seasonal tendency is for the market to rally from late June until September, which is a tough month for stocks. To pick which sectors will likely do best, I look at the monthly, weekly, and daily technical studies.

The relative performance is especially important. In October 2010, the weekly relative performance analysis turned positive on the Select Sector SPDR Energy (XLE). By the end of the first quarter of 2011, XLE was up 40.8% but the more narrowly focused SPDR S&P Oil & Gas Exploration & Production ETF (XOP) was even better, gaining 51.5%. Both did much better than the SPY, which was up 16.2%, and of course, some of the individual energy stocks did even better than the ETFs

Given the sharp gains already this month, the entry level and stop are key considerations as they are two of the five rules that I think need to be followed if you want to increase the odds of success in 2013.

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The Select Sector SPDR Financial (XLF) was one of my Best Sector Bets for the New Year that I highlighted in the middle of December. The weekly chart shows that it tested the uptrend from the 2013 lows, line a, in June before turning higher. The 20-week EMA was violated but XLF did not close below it.

XLF is already close to the previous 2013 high at $20.35. The weekly starc+ band is at $20.88 with the monthly at $21.35. In 2007, XLF traded as high as $38.15 so the 50% Fibonacci retracement resistance is at $22.02.

The weekly relative performance broke its six-month downtrend, line b, in early September 2012, and later in the month, it pulled back to its rising WMA. The RS line has since made a series of higher highs, and on the recent pullback, held well above its WMA and the support at line c.

The weekly OBV moved to new highs last August and also shows a pattern of higher highs. The OBV dropped below its WMA and tested its uptrend in both December 2012 and April 2013. The OBV held above its WMA in June (see arrow).

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The five-week correction from the May highs took the Select Sector SPDR Financial (XLF) back to its daily starc- band and the uptrend, line a. They were both tested on June 21. The completion of the continuation pattern has a 127.2% Fibonacci retracement target at $20.82.

The rising 20-day EMA is at $19.64 with the recent swing lows at $19.34. The monthly projected support using the methods of John Person is at $18.86.

The daily relative performance shows a series of higher highs and the short-term downtrend, line b, was broken four days ago. It retested the WMA before the breakout. The daily OBV dropped slightly below its long-term downtrend, line e, in June.

The move in the daily OBV above the resistance at line d, confirmed that the correction was over. The OBV is now rising sharply as the volume was strong on Tuesday.

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The Select Sector SPDR Consumer Discretionary (XLY) has also been very strong this year as it is up 23.4% through Tuesday July 9. The weekly chart shows that the starc+ band was tested in May before the six-week correction back to the rising 20-day EMA. It had a low of $53.96 on June 24. The uptrend from the late 2012 lows is now at $52.55.

The relative performance has made new highs over the past two weeks and has turned up sharply. It last dropped below its 21-week WMA in February 2013 and shows a clear pattern of higher highs and higher lows.

The weekly OBV broke through resistance line d, and made new highs in early 2013 (point 1). The OBV dropped below its WMA for one week in late June, but is still below the prior highs. It has longer-term support at the uptrend, line e. Last week’s low and quarterly pivot provide good support now at $56.50 to $55.48.

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The downtrend, line a, on the daily chart was overcome on July 2 as the Select Sector SPDR Consumer Discretionary (XLY) has accelerated to the upside and is now testing the daily starc+ band. The 127.2% Fibonacci retracement target is at $59.24.

There is initial support now at $56.75-$56.95 and the rising 20-day EMA. The daily starc- band is at $56.04.

The daily relative performance made significant new highs this week and is well above its rising WMA. There is more important support now at line c, as the RS line broke out to the upside in April.

The daily OBV did confirm the highs in May before it dropped below its WMA. The OBV closed below its long-term uptrend, line d, for four days in late June but is now well above it. The daily OBV has not yet confirmed the new highs but it is not far below them.

The Select Sector SPDR Health Care (XLV) has been a favorite since May of 2012 as the S&P Health Care Sector broke out of a 12-year trading range in March. The initial upside target at 550 has already been overcome as it is trading above 560.

The XLV is a more narrowly focused healthcare play with over 13% in Johnson and Jonhson (JNJ) and over 10% in Pfizer (PFE). The weekly chart shows that the weekly starc+ band was tested in May and that it held above the 20-week EMA on the correction.

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The monthly and quarterly pivot lines are at $47.85 and $47.95, respectively, with June’s low at $46.81. There is next weekly resistance at $49.13 and then the all-time highs at $50.40 when a doji was formed. A low close doji (LCD) was triggered the following week, which was consistent with the recent correction.

The 127.2% Fibonacci retracement target is at $51.42, which is the next potential upside target.

The weekly relative performance broke through eight-month resistance, line b, in May 2012, which was a positive sign. In 2013, it peaked in April ahead of prices and did not make a new high in May. The RS line has broken its short-term downtrend and is still holding above its WMA (point 1).

The OBV did make a new high last week and is acting stronger than prices. It held well above its rising WMA during the recent correction with major support now at line d. The monthly OBV (not shown) did make a new high in May and is trying to turn up in July. It is well above its WMA and support.

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The daily chart shows that support going back to the April 8 low of $46.02, line a, was tested in June. A significant break below this level could complete a more significant top formation. There is next resistance on the daily chart at $49.10 and then further at $49.35.

The daily relative performance peaked in the latter part of April before dropping back to support. Since May it has been matching the performance of the S&P 500 but not leading it higher. A drop below the May lows will weaken the technical outlook.

The daily OBV did confirm the May highs for XLV and it turned up after testing the uptrend that goes back to the early 2013 lows, line d. The OBV is now back above its WMA, and it could make new highs with further strength.

The 20-day EMA is now at $48.10 with additional support in the $47.18-$47.23 area.

So which other ETFs could be candidates for market leading sectors as we start the last half of the year?

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Three of the Select Sector SPDR ETFs look the most interesting for new market leadership. The first I would like to look at is the Select Sector SPDR Industrials (XLI). Through March 15, XLI was one of the Best Bull Market Sectors as it was up 177% versus 131% for the Spyder Trust (SPY).

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