Strong market performance this week has set up favorable risk/reward buying opportunities in top-performing sector ETFs tracking consumer discretionary, technology, and consumer staples.
The impressive rally on Tuesday rescued the stock market from critical support, as the financial-heavy Spyder Trust (SPY) dropped below the 61.8% support on Monday, but closed well off the lows. The Dow Industrials retraced just over 50% of the prior rally while the tech-heavy PowerShares QQQ Trust (QQQ) held its 38.2% retracement support.
The Advance/Decline (A/D) lines for all of the major averages have turned up sharply, but it will be important that they keep pace with prices and confirm any upside breakouts. The McClellan Oscillator has turned up from oversold levels, and at -42, it is well below overbought territory.
The decline into the June lows and the rally into the early-July highs have caused some significant changes in the relative performance, or RS analysis, for the major sectors. Since mid-April, my sector analysis has favored consumer staples and health care as the “new star performers.”
Though these two sectors still look positive technically, they are not currently leading the market higher like they did going into the May highs. In June, I added the Select Sector SPDR – Utilities (XLU) to my favored list as well. (See “The Best Sectors for Summer.”)
Chart Analysis: The Select Sector SPDR – Consumer Discretionary (XLY) moved through its downtrend, line a, in late June, rallying to a high of $41.78. XLY held the 50% support level on Monday with a low of $39.63.
The rally in the Select Sector SPDR – Technology (XLK) from the June lows was impressive, as the fund gained 9.5% versus a 7.5% gain for the Spyder Trust (SPY). Though the difference may not seem too dramatic, XLK outperformed SPY by 2% in just nine days.
NEXT: See Latest Price Action for Health Care and Consumer Staples