Though some my be tempted to jump into lagging sectors, MoneyShow's Tom Aspray explains why stock pickers should still concentrate on stocks in the market leading sectors and he shares two new new picks.

The stock market's impressive afternoon rally caught many off guard as the S&P cash rallied 17 points from the intra-day lows to close at new all time highs. The new highs in the S&P 500 were confirmed by the new highs in its A/D line. If this is the start of a new rally phase it will be a very difficult month for fund managers.

In Friday's Where to Invest Your Cash, I gave a recommended strategy for those who have not been in the stock market but want to get involved now. Clearly, it has been a split market as not all stocks and sectors have participated in the rally this year.

There are several sectors that have not made new highs with the market and I am keeping an eye on these lagging sectors for signs that they are ready to catch up. Given the new market highs, stock pickers should still concentrate on stocks in the market leading sectors for new opportunities.

The yearly performance analysis of the sector ETFs (see table) reveals that the Select Sector Health Care (XLV) is still one of the star performers, up 15.7%. In the past few months, there have been signs that the Select Sector Consumer Discretionary (XLY) was becoming a market leader. Though it is up just 3.7% so far in 2014, it is up 6.5% from the August low.

Two stocks from these sectors have been trading in tight ranges recently, while the weekly charts show flag formations which the technical studies indicate will be resolved to the upside.  They look like two good picks for stock investors.

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Chart Analysis: The Select Sector Health Care (XLV) has rallied sharply over the past four weeks.

  • The upper boundary of the trading channel (line a) and the quarterly pivot resistance are in the $65.26 area.
  • This also corresponds to the weekly starc+ band with the monthly a bit high at $66.06.
  • Friday's low at $63.15 was quite close to the rising 20-day EMA at $62.90.
  • The close was 1.8% above the EMA so the EMA Osc analysis indicates this is now a good entry point for XLV.
  • The weekly relative performance moved above its WMA in mid-June (see arrow).
  • The RS line has continued to make new highs, consistent with a market leading sector.
  • The weekly OBV is back above its WMA but has not yet confirmed the new highs.
  • The monthly pivot is at $62.49 with the monthly projected pivot support at $61.07.
  • The rising 20-week EMA is at $60.84.

Thermo Fisher Scientific (TMO) is a $49.8 billion medical laboratory and research company.

  • It is up 12.2% YTD and is just 2.35% below its 52-week high.
  • The weekly shows a flag formation, lines e and f, that goes back to the early March highs.
  • The 127.2% Fibonacci target from the flag formation is at $131.24.
  • The measured target from the flag formation is in the $141-$143 area.
  • The relative performance also shows a flag formation, lines g and h.
  • The RS line has just moved above its WMA.
  • The weekly OBV closed back above its WMA last week, triggering an AOT buy signal.
  • The daily studies are both clearly positive as TMO is testing its daily starc+ band.
  • There is initial support at $122.70 with the 20-day EMA at $121.99.
  • The monthly pivot is at $120.60 with the daily starc- band at $117.95.

NEXT PAGE: Another ETF and Stock to Watch

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The Select Sector Consumer Discretionary (XLY) tested the quarterly pivot at $65.14 in early August before rallying sharply.

  • The quarterly projected pivot resistance and weekly starc+ band are in the $70.43- $70.55 area.
  • The monthly starc+ band is at $72.60.
  • The weekly RS line completed its bottom formation in early August as it moved above resistance at line c.
  • The WMA of relative performance is rising, which is a positive sign.
  • The weekly on-balance volume (OBV) broke through strong resistance, line a, in the middle of August.
  • The rising 20-day EMA is now at $68.29 with the monthly pivot at $67.67.
  • The monthly projected pivot support is at $66.31.

Starbucks Corp. (SBUX) closed Friday back above its 20-day EMA at $77.57. The weekly chart shows a tight range over the past five weeks.

  • Prices have been holding above the flat 20-week EMA at $76.13.
  • SBUX has been in a broad trading range since late 2013, lines e and f.
  • A strong close above $80.37 will complete the chart formations.
  • The 127.2% Fibonacci target from the trading range is at $85.56.
  • The trading range has measured upside targets in the $90-$92 area.
  • The weekly relative performance has dropped back below its WMA.
  • The RS line needs to move through resistance at line e, to confirm it is a market leader.
  • The OBV has been acting stronger than prices as it has been holding above its rising WMA.
  • The quarterly pivot now stands at $74.22.

What it Means: Both the Select Sector Health Care (XLV) and Select Sector Consumer Discretionary (XLY) are already part of the Charts in Play portfolio and I see no good entry at current levels.

The weekly continuation pattern of these two stocks and tight ranges makes these them attractive from a risk reward perspective. The weekly OBV analysis is consistent with an upside breakout from their recent trading ranges.

A slight pullback is needed for Thermo Fisher Scientific (TMO) while Starbucks Corp. (SBUX) close Friday suggests the initial buy should be close to Friday's close.

How to Profit: For Thermo Fisher Scientific (TMO) go 50% long at $123.04 and 50% long at $121.77 with a stop at $117.67 (risk of approx. 3.9%).

For Starbucks Corp. (SBUX) go 50% long at $77.81 and 50% long at $76.62 with a stop at $73.87 (risk of approx. 4.6%).