ETFs

We're heading deeper into what has traditionally been the market's summer doldrums, and things have been anything but sluggish, so MoneyShow's Tom Aspray, goes in search of the next market-leading sectors.

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.

chart
Click to Enlarge

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.

chart
Click to Enlarge

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.

NEXT PAGE: Two Strongest Sectors

Tickers Mentioned: XLE, XLY, XLV, XLI