3 Sectors Leading the Charge

03/09/2012 11:30 am EST

Focus: ETFs

Thomas Aspray

, Professional Trader & Analyst

Renewed strength in energy and financials as well as a breakout in the lagging financial sector is needed to keep the stock market rally moving forward.

As we head into the final month of the first quarter, three of the ten major sectors are showing gains in excess of 10% for the quarter. Several sectors have been correcting since the January highs, however, and may be close to turning around.

Only one sector ETF, the Select Sector SPDR - Utilities (XLU) has had a negative performance for the first quarter, but as I wrote yesterday, the utilities are entering a strong seasonal period and there are signs that the correction in this sector may be ending.

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The first quarter statistics also show that six sectors are currently outperforming the S&P 500, which reflects the broad-based nature of the stock market rally. It should be no surprise that the Select Sector SPDR - Technology (XLK) is the best performer, up 14.1%. Apple Inc. (AAPL) makes up over 17% of the ETF, followed by Microsoft Inc. (MSFT) at 8.3%. While this is an inexpensive way to participate in Apple’s growth, it will also be overly sensitive to any declines in the stock.

For the stock market to continue moving higher, it will be important that one sector is able to break out to new highs and that two currently lagging sectors complete their corrections.

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Chart Analysis: The Select Sector SPDR - Financial (XLF) has been locked in a fairly narrow range for the past five weeks, but it has held well above the chart support in the $14.20 area, line b.

  • The next strong chart resistance is in the $15.40 area, line a, with a major bank of resistance in the $16.50-$17.20 area
  • Relative performance, or RS analysis, did not confirm the upside breakout, as it is still below resistance at line c
  • Weekly RS analysis (not shown) has also not yet completed its bottom formation
  • The daily on-balance volume (OBV) dropped below its weighted moving average (WMA) in mid-February and is now testing its uptrend, line d

The Select Sector SPDR - Technology (XLK) broke through major resistance, line e, in January and accelerated to the upside. The weekly Starc+ band is now at $30.05 with additional upside targets in the $32 area.

  • The RS analysis confirmed the price action by breaking its downtrend, line g. There is strong support at the uptrend, line h
  • OBV broke its downtrend (line i) in early February and just pulled back to its weighted moving average this week. It shows no signs yet of a top
  • Weekly OBV (not shown) is positive but is well below the 2011 highs
  • There is initial support now at $28.40 with stronger support in the $27.50 area. The major support stands at $26.50, line e

NEXT: Important Sector ETFs Tracking Energy, Materials

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The Select Sector SPDR - Energy (XLE) dropped to test the September highs and stronger support (line a) at $72.50 this week. There is further support now at $68.74- $70.13 with major support at $64.80.

  • The daily RS line has formed lower highs, line b, indicating that XLE has been underperforming the S&P 500. It is now also below its weighted moving average
  • A break in the RS line below support at line c would be more negative
  • Daily OBV failed to move through resistance at line d, which is a now a key level to watch. It has turned up and is still well above its uptrend, line e
  • There is now resistance at $75.60-$76.20

The Select Sector SPDR - Materials (XLB) is up 9.4% in the first quarter but is still 3.6% below its recent high at $37.97. It hit its uptrend, line g, early in the week.

  • The daily RS line has been below its weighted moving average since early February but has now turned up. The weekly RS line (not shown) is also below its WMA and could break support this week
  • Daily OBV looks much stronger and has held up better than prices. It has not gotten close to support at line i
  • There is further OBV support at the uptrend from the October lows, line j
  • First support for XLB is now in the $35.60-$36 area with the major 38.2% Fibonacci retracement support at $34.08

What It Means: This analysis suggests that the energy, financial, and materials sectors need to be watched closely in March. Given the seasonal pattern for crude oil to bottom in February, the energy stocks look the most attractive for new purchases.

See also: The 4 Key Seasonal Trends for 2012

There are also likely to be some new opportunities in the technology sector, while the completion of a weekly bottom in the RS analysis is needed to turn me more positive on the financials.

Friday’s monthly jobs report was released this morning and was better than expected. The stock index futures were higher in reaction to the report, and a higher daily close on Friday would suggest that the uptrend in the stock market has resumed.

How to Profit: I am still cautious about adding new positions in the sector ETFs at this time, although I will be watching them closely for new entry points.

Portfolio Update

  • For the Select Sector SPDR - Technology (XLK), buyers were 50% long at $23.66 and 50% long at $23.12. As per the earlier recommendation, half the position was sold at $28.06 or better. Use a stop at $27.44 on the remaining position
  • The 50% long position in the Select Sector SPDR - Materials (XLB) from $36.88 was stopped out at $36.84
  • As recommended in mid-August, buyers should be 50% long the Select Sector SPDR - Consumer Staples (XLP) at $29.08 and 50% long at $28.88. Half the position was sold at $32.56 or better. Use a stop at $31.48 on the remaining position

NEXT: See the Complete Charts in Play Portfolio

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Find all of Tom’s market comments by bookmarking his columnist page.

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