4 Surviving Sectors

08/16/2011 11:49 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

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%.

Click to Enlarge

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.

Click to Enlarge

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


Click to Enlarge

The Select Sector SPDR - Health Care (XLV) closed just below the weekly Starc+ band in mid-May and then exceeded it the following week before turning lower. XLV failed to make new rally highs in early July, leading the way for the recent collapse.

  • Both the weekly and monthly Starc- bands were exceeded last week when the low at $29.64 was not far above the major 50% support at $29.20
  • The RS broke its major downtrend, line a, in April, signaling its market-leading performance in the second quarter. A drop below the recent lows will create a new downtrend, so the next month will be important
  • The OBV did confirm the May high but then broke both its weighted moving average and its uptrend (line b) in July. The daily OBV (not shown) has just turned positive
  • There is short-term resistance now at $32.50 with the 50% retracement resistance at $33.09

The Select Sector SPDR - Technology (XLK) held up better in the early stages of the market decline before plunging through support, line c, just before the US downgrade. XLK has outperformed the S&P 500 so far this year, as it is down 2.5% versus the 4.2% decline for the S&P 500.

  • XLK has already rebounded to first resistance, line c, with the 50% retracement resistance at $24.90
  • The RS moved through its long term downtrend, line d, in late July, and has since rallied sharply
  • The daily OBV tested major resistance, line e, in June before turning lower. It has just moved back above its WMA. The weekly OBV (not shown) is still negative
  • XLK has first support at $23.60-80 with much stronger at $22.80-$23.20. The major 38.2% support is at $21.84

What It Means: Based on the relative performance analysis for the major market sectors, the Select Sector SPDR - Utilities (XLU) and Select Sector SPDR - Consumer Staples (XLP) look the best.

The decline in the Select Sector SPDR - Health Care (XLV) has clearly weakened the intermediate-term outlook, and though it normally performs best in the latter stages of a bull market, I am currently not impressed.

The Select Sector SPDR - Technology (XLK) may be the area which can push the market higher for the rest of the year, and the tech sector has the best fundamentals as well.

The Select Sector SPDR - Energy (XLE) is acting pretty well, and while the weekly analysis is still negative, the decline in crude oil has taken the fund to more important support. I will have more on the energy sector in the near future.

How to Profit: Go 50% long the Select Sector SPDR - Utilities (XLU) at $31.24 and 50% long at $30.84 with a stop at $28.38 (risk of approx. 8.5%).

For the Select Sector SPDR - Consumer Staples (XLP), go 50% long at $29.08 and 50% long at $28.88 with a stop at $27.96 (risk of approx. 5.5%).

For the Select Sector SPDR - Technology (XLK), go 50% long at $23.66 and 50% long at $23.12 with a stop at $21.74 (risk of approx. 7.1%).

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on ETFS

Keyword Image
Safe Money's Defensive Moves
12/05/2018 5:00 am EST

This stock market is flailing around like a fish out of water, with whipsaws increasing every week, ...