11 Sector ETFs Explain The Dynamics Of The U.S. Stock Market

Richard Suttmeier

The technology sector ETF is the outperformer year to date, thanks to its two largest components Apple (AAPL) and Microsoft (MSFT). In second place is the healthcare sector ETF thanks in part to its largest component Johnson & Johnson (JNJ). In third place is the consumer discretionary ETF thanks to its largest component Amazon.com (AMZN).

The only sector ETF in correction territory is the energy sector ETF. The largest component Exxon Mobil (XOM) set its post-election low on Friday, as the second largest component Chevron (CVX) rebounded.

This Week’s Scorecard For The 11 S&P 500 Exchange-Traded funds

SPDR Dow Jones REIT ETF (RWR)

The weekly chart for the REIT Sector ETF ($93.89 on July 28) is positive with the ETF above its five-week modified moving average of $93.07. The 200-week simple moving average is the “reversion to the mean” at $88.43, last tested during the week of Feb. 12, 2016 when the average was $81.06. The 12x3x3 weekly slow stochastic reading rose to 53.28 last week, up from 49.22 on July 21.

Investment Strategy: Buy weakness to the 200-week simple moving average at $88.43. Sell strength to my semiannual risky level of $97.61.

Materials Sector SPDR Fund (XLB)

The weekly chart for the Materials Sector ETF ($55.06 on July 28) is positive but overbought with the ETF above its five-week modified moving average of $54.39. The 200-week simple moving average is the “reversion to the mean” at $47.84, last tested during the week of July 1, 2016 when the average was $44.51. The 12x3x3 weekly slow stochastic reading rose to 81.90 last week rising above the overbought threshold of 80.00.

Investment Strategy: Buy weakness to my quarterly value level of $47.60. My semiannual pivot is $55.26. Sell strength to my annual risky level of $61.72.

Industrial Select Sector SPDR Fund (XLI)

The weekly chart for the Industrial Sector ETF ($68.40 on July 28) is positive but overbought with the ETF above its five-week modified moving average of $68.25. The 200-week simple moving average is the “reversion to the mean” at $55.97, last tested during the week of Jan. 22, 2016 when the average was $47.92. The 12x3x3 weekly slow stochastic reading ended last week at 86.85, above the overbought threshold of 80.00.

Investment Strategy: Buy weakness to my quarterly value level of $65.11. My semiannual pivot is $69.69. Sell strength to my annual risky level of $70.05.

Consumer Discretionary Select Sector SPDR Fund (XLY)

The weekly chart for the Consumer Discretionary Sector ETF ($91.30 on July 28) is positive with the ETF above its five-week modified moving average of $90.31. The 200-week simple moving average is the “reversion to the mean” at $75.41. The 12x3x3 weekly slow stochastic reading rose to 58.86 up from 56.34 on July 21.

Investment Strategy: Buy weakness to my quarterly value level of $87.57. Sell strength to my annual and semiannual risky levels of $97.00 and $97.38, respectively.

Consumer Staples Select Sector SPDR Fund (XLP)

The weekly chart for the Consumer Staples Sector ETF ($55.34 on July 28) is positive with the ETF above its five-week modified moving average of $55.25. The 200-week simple moving average is the ‘reversion to the mean” at $49.21. The 12x3x3 weekly slow stochastic reading rose to 31.97 last week up from 31.00 on July 21.

Investment Strategy: Buy weakness to the 200-week simple moving average of $49.21. Sell strength to my semiannual and annual risky levels of $57.86 and $58.03, respectively.

Energy Select Sector SPDR Fund (XLE) – Chart of the week.

Courtesy of MetaStock Xenith

The weekly chart for the Energy Sector ETF ($66.47 on July 28) is positive with the ETF above its five-week modified moving average of $65.74. This ETF is below its 200-week simple moving average, or “reversion to the mean” of $75.89 last tested during the week of Dec. 16, when the average was $77.65. The 12x3x3 weekly slow stochastic reading rose to 27.38 last week rising above the oversold threshold of 20.00.

Investment Strategy: Buy weakness to my quarterly value level of $57.58. Sell strength to my semiannual risky level of $70.39.

Financial Select Sector SPDR Fund (XLF)

The weekly chart for the Financial Sector ETF ($24.91 on July 28) is positive but overbought with the ETF above its five-week modified moving average of $24.53. The 200-week simple moving average is the “reversion to the mean” at $19.73, last tested during the week of July 1, 2016 when the average was $17.58. The 12x3x3 weekly slow stochastic reading rose to 80.89 last week moving above the overbought threshold of 80.00.

Investment Strategy: Buy weakness to my annual and quarterly value levels of $23.65 and $22.47, respectively. My semiannual pivot is $24.35. Sell strength to my monthly risky level of $27.70. Note that this ETF is below its June 2007 high of $30.83.

Utilities Select Sector SPDR Fund (XLU)

The weekly chart for the Utilities Sector ETF ($53.04 on July 28) has a positive weekly chart with the ETF above its five-week modified moving average of $52.68. The 200-week simple moving average is the “reversion to the mean” at $45.53. The 12x3x3 weekly slow stochastic reading rose to 44.00 last week up from 42.42 on July 21.

Investment Strategy: Buy weakness to my semiannual and annual value levels of $51.98 and $50.72, respectively. Sell strength to my quarterly risky level of $56.64.

Health Care Select Sector SPDR Fund (XLV)

The weekly chart for the Health Care Sector ETF ($79.96 on July 28) has a positive but overbought with the ETF above its five-week modified moving average of $79.07. The 200-week simple moving average is the “reversion to the mean” at $68.14. The 12x3x3 weekly slow stochastic reading ended last week at 85.69, above the overbought threshold of 80.00.

Investment Strategy: Buy weakness to my quarterly value level of $70.42. My annual pivot is $78.09. Sell strength to my semiannual risky level of $87.40.

Technology Select Sector SPDR Fund (XLK)

Courtesy of MetaStock Xenith

The weekly chart for the Technology Sector ETF ($57.44 on July 28) is positive with the ETF above its five-week modified moving average of $56.25. The 200-week simple moving average is the “reversion to the mean” at $43.01, last tested during the flash crash of Aug. 24, 2015 when the average was $34.22. The 12x3x3 weekly slow stochastic reading rose to 73.73 last week up from 67.71 on July 21.

Investment Strategy: Buy weakness to my semiannual, annual and quarterly value levels of $55.95, $55.49 and $53.92, respectively. Sell strength to my monthly risky level of $61.35.

iShares Transportation Average ETF (IYT)

Courtesy of MetaStock Xenith

The weekly chart for the Transportation Sector ETF ($166.04 on July 28) is neutral with the ETF below its five-week modified moving average of $169.62. The 200-week simple moving average is the “reversion to the mean” at $147.77, last tested during the week of July 8, 2016 when the average was $132.92. The 12x3x3 weekly slow stochastic reading declined to 83.25 last week down from 88.97 on July 21. This reading will likely be declining below the overbought threshold of 80.00 next week downgrading the weekly chart to negative.

Investment Strategy: Buy weakness to my quarterly value level of $158.89. Sell strength to my semiannual and annual risky levels of $181.18 and $182.54, respectively.

Methodology

Investors should focus on the basic technical analysis tools focusing on weekly charts, and the value levels at which to “buy on weakness” and risky levels at which to “sell on strength”.

When looking at the weekly charts below, keep an eye on the 200-week simple moving averages shown in green. Investors should consider this level as the "reversion to the mean". The "reversion to the mean" is an investment theory that the price or an index, stock or ETF, will eventually return to a longer-term simple moving average, and the 200-week is simple to track. A ticker trading above its “reversion to the mean” will eventually decline back to it on weakness. Similarly, a ticker trading below its “reversion to the mean” will eventually rebound to it on strength.

When reading a weekly chart, you will see the five-week modified moving average in red. At the bottom of the graph from left to right, you will see a measure of technical momentum. I advocate the 12x3x3 weekly slow stochastic, which scales from 0.00 to 100.00. Readings rising or overbought above 80.00 are positive. Readings declining of oversold below 20.00 are negative. A technical buy signal occurs when stochastics rises above 20.00 with the ticker ending the week above its five-week modified moving average. A technical sell signal occurs when stochastics falls below 80.00 with the ticker ending the week below its five-week modified moving average.

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