SH @ the bell 5/17/12: Searching for strength in a weak market | Stock Haven | Stock Chat Room | Penny Stocks | Options |Stock Haven | Stock Chat Room | Penny Stocks | Options |

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SH @ the bell 5/17/12: Searching for strength in a weak market

The true test of one’s skills as a trader is if they can make money in both a rising market and a falling one. The easiest way to do this is by mastering short trading, be it thru put options or the stocks/index ETF’s themselves, but its not the only way. You can also search for stocks/sectors that are holding up well in the face of broader market weakness and trade within those trends. One of the ways to identify what those stocks/sectors might be, is by comparing the numerous SPDR ETF’s: XLY, XLE, XLU, XLP, XLV, XLK, XLF, XLI, XLB.

When evaluating these various sector ETF’s you should look for signs of strength. For example, the broader market has fallen below its most recent lows of April and March, so sector ETF’s that haven’t done the same could be revealing some underlying strength. Based on criteria such as the one cited in our example, XLY, XLU, XLP, & XLV are all showing signs of strength relative to the market. What’s especially interesting about this, is that 3 out of the 4 (all but XLY), we identified as being benefits of potential sector rotation back on April 5th. Here is a sample of our research from back then:

“Being that this week brought the start of a new quarter, we believe we might be observing some sector rotation right now. We’re going to start by analyzing the year to date gains seen in key sector ETF’s to determine what sectors have performed well so far in 2012:

  • XLF (financials) up 19.8% ytd
  • XLK (technology) up 17.6%
  • XLY (consumer discretionary) up 14.6%
  • XLI (industrials) up 10.8%
  • XLB (materials) up 10%
  • XLV (healthcare) up 8.7%
  • XLP (consumer staples) up 5.5%
  • XLE (energy) up 2.7%
  • XLU (utilities) down 1.6%

As you can see, financials & technology have been by far the best performing sectors of 2012, with consumer discretionary not far behind. Industrials, materials, & healthcare have performed solid. Meanwhile, consumer staples, energy, and utilities, have all lagged behind. Now let’s compare the lows in these ETF’s seen this week (first week of Q2), to their lows from last week (last week of Q1) – % difference in ():

  • XLF – $15.57 last week vs $15.51 this week (-0.038%)
  • XLK – $30.03 vs $29.91 (-0.04%)
  • XLY – $44.39 vs $44.42 (0.006%)
  • XLI – $36.75 vs $36.95 (0.054%)
  • XLB – $36.33 vs $36.48 (0.004%)
  • XLV – $36.81 vs $37.43 (1.68%)
  • XLP – $33.64 vs $33.98 (1.0%)
  • XLE – $70.17 vs $70.53 (0.05%)
  • XLU – $34.39 vs $34.93 (1.6%)

Do you notice what we notice? The two sectors that performed the best in Q1, have performed the worst vs their lows from last week so far this week. Meanwhile, the four sectors that performed the worst in Q1 have held up better this week vs their lows from last week. In addition, materials and industrials, which performed good but not great, are also holding up better vs their lows from last week during the market weakness.”
-SH @ bell 4/5/12: Are we in the early stages of sector rotation?

The fact that these ETF’s have held above their most recent lows and that they started to hold up well in early April when the market had in fact put in what we now know was its year-to-date high (so far anyway), leads us to believe these sectors are indeed benefiting from sector rotation. The charts on these ETF’s, with the exception of XLY which has a ominous volume pattern, look very healthy. Now its just a matter of identifying some stocks within those sectors that also have healthy charts.

In the consumer staples (XLP) space, KO actually managed to make new year-to-date highs this month while the market has sold off. KO has pulled back recently, but its still above its prior breakout high around $74. If KO is too boring for you, try a sexy name like WFM, which surged to a new all time high in early May. Like KO, WFM has pulled back more recently, but is still in a very healthy uptrend and has support around its prior breakout highs in the $84-$86 range. There’s also a name like KMB, which traded to a fresh all time high on Wednesday and looks extremely bullish on the charts.

We know that shorting can be an intimidating and sometimes uncomfortable market skill to try and master, but to not trade at all simply because the broader market is suffering just means your being lazy. If you really want to find good opportunities, you just have to do a little research. Maybe that means looking at more charts than you normally do each night, but if you’re trying to avoid the carnage the market has been going thru lately it is completely worth it. You can get full lists of all the holdings of the ETF’s we mention to help guide you in your trading by visiting this link.

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