The magnitude and speed of the recovery in equities from the October dip caught many of us off guard, myself included. The price action affirms the cyclical bull market. And we’re in the seasonally strong November-January period that augurs well for equities. So which sectors are on my watch list?
As I looked over various sector exchange traded funds (ETFs), three sectors stood out in terms of relative strength against the S&P 500:
- Health Care Select Sector SPDR (XLV)
- XLK Technology Select Sector SPDR (XLK)
- iShares Transportation Average (IYT)
Take a look at weekly charts of the three ETFs below. The indicator at the bottom measures performance relative to the S&P 500 SPDR ETF (SPY). Most of you are likely familiar with a relative strength line that divides the price of one asset by the other. So, for example, a rising line on a chart of XLV and SPY means health care stocks are doing better than the broader market. The blue and orange lines at the bottom of each chart shown are a fast and slow average of that relative strength line, which I incorporate in order to reduce false signals and get a better picture of the trend in relative strength.
Stock Market Leadership Chart – 2012 to present
As you can see, XLV (Healthcare) has been outperforming the broader stock market since early 2012, XLK (Technology) since about the middle of 2013, and IYT (Transportation) since late 2012. As long as the price action affirms the cyclical bull market, these sectors should continue to provide opportunities upon dips.
Keep in mind momentum for the S&P 500 reached an overbought condition at the start of this year and has steadily deteriorated since. That means this bull is probably maturing, and 2015 may not match the stellar performance of 2014 (thus far) or 2013. Always remember that it is okay to remain patient when looking for opportunities. Good trading, everyone.
Follow Chris on Twitter: @ChrisBurbaCMT
No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.