ETFS

Only four sectors are higher for the year, but RS analysis indicates that a few are likely to outperform in the months ahead, making the corresponding sector ETFs good buys on any pullbacks.

It has been a wild year for most market sectors, and the sharp recent plunge in the stock market has not helped to clarify the picture. The first quarter’s star performer was the Select Sector SPDR - Energy (XLE), which gained 16.8%, leading the second-best performer, the Select Sector SPDR - Industrial (XLI), by over 8%.

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As the table above indicates, these two sectors have not done well since the first quarter, as XLE was down 5.5% in the second quarter and has lost 8.1% so far in the current quarter. XLI held up well in the second quarter, falling just 1.1%, but it is the weakest of all sector ETFs so far in the current quarter, losing 14.4%. This is considerably more than the losses sustained by the S&P 500.

For the year, only four sectors are in positive territory, but all have also been hit hard over the past three weeks, as they are all well below the 2011 highs and have broken several levels of support.

The Select Sector SPDR - Utilities (XLU) has been the best performer so far in 2011, up 4.6% versus the 4.2% drop in the S&P 500. It was one of my early favorites (see “3 Sizzling Summer Sectors”), but has been quite volatile this summer. It has also led the market on the rally from last week’s lows.

The two other defensive sector ETFs I recommended in July, the Select Sector SPDR - Health Care (XLV) and Select Sector SPDR - Consumer Staples (XLP), are still up for the year, although health care has been much weaker than expected this quarter, down 9.5%. The deterioration in XLV suggests that it’s best to avoid it for now.

Those sectors with positive relative performance, or RS analysis, are expected to outperform the S&P 500 in the coming months, and the corresponding sector ETFs would look attractive on a pullback towards the recent lows.

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Chart Analysis: The Select Sector SPDR - Utilities (XLU) came very close to its long-term uptrend, line a, at $29.30 last week. The major 50% Fibonacci retracement support is at $28.48, and if broken, it would suggest a drop to the 61.8% support at $27.06. (See also “Fibonacci Analysis: Master the Basics.”)

  • XLU has rebounded 11.3% from last week’s lows and has next resistance at $33-$33.50
  • The RS analysis completed its bottom formation in the spring and the major downtrend (line b) has now been overcome. The RS is in a clear uptrend, line c, which is positive
  • The daily on-balance volume (OBV) has held major support at line d, and is very close to the recent highs
  • XLU closed Monday at its daily Starc+ band, so a pullback is overdue. First good support is in the $30.80-$31.25 area

The Select Sector SPDR - Consumer Staples (XLP) is traditionally a very defensive sector ETF, so the recent drop below the November 2010 and 2011 lows at $28.22 was a surprise. The major 38.2% support is at $28.38.

  • There is next strong resistance in the $30.30-$30.60 area with former trend line support (line e) at $30.90
  • The RS line is still in a solid uptrend, line f, after bottoming out at the start of the second quarter
  • The daily OBV did confirm the May highs before turning lower. The daily downtrend, line g, has just been overcome, which is a positive sign
  • There is short-term support now at $29.20 with stronger support in the $28.60 area

NEXT: Latest for ETFs Tracking Health Care and Technology

Tickers Mentioned: Tickers: XLU, XLK, XLV, XLP, XLI