Trading Energy and Tech ETFs

In our last "Sector Detector" post we discussed some possible strategies in the utilities and materials exchange traded funds, based on rankings by Sabrient Systems. Those rankings changed this week and, as a result, so have our trading ideas.

On June 17 I suggested a long position in the sector ETF with the highest "outperform" rank, Utilities Select Sector SPDR (XLU), and a short position in the ETF sector with the highest "underperform" outlook, Materials Select Sector SPDR (XLB). Sabrient's "Forward Looking Sector Rankings" assign a score of 0 to 99 to each sector, with 0 as the highest underperforming industry and 99 as the highest outperforming group.

This week, the energy sector now has the highest score at 73, and the technology sector has the worst score at 30. So these scores represent the the view that energy sector stocks may be undervalued and IT sector stocks may be overvalued, for at least the next 30 days.

Remember, you can use this information three ways. First, if you currently are bullish on the broader market, you can go long the S&P 500's SPY exchange traded fund and "enhance" it with a long position the highest outperform-ranked sector ETF, which is now the Energy Select Sector SPDR (XLE).

Conversely, if you think that SPY looks overbought and you short it, you may also want to consider shorting the highest underperform-ranked sector ETF--now the Technology Select Sector SPDR (XLK)--to enhance your short bias.

Finally, if you really don't care which way the market is going, try a market-neutral, long/short pair trade--that is, long the outperform sector (XLE) and short the underperform sector (XLK).

Now let's look at the results at the results of our first "Sector Detector" suggestion: long the Utilities Select Sector SPDR (XLU) and short the Materials Select Sector SPDR (XLB).

From June 5 to June 22, the XLU went from $27.12 to $27.15 and XLB from $27.54 to $25.07.

If you enhanced your bullish broad market view with a long XLU position, you didn't do so hot. If you enhanced your bearish broad market view with a short XLB position, you were hot. Likewise, if you were market-neutral with a long XLU short XLB, you also did just fine.

Again, based on the current Sabrient sector rankings, you may want to consider going long XLE and short XLK. Check back with next week's "Sector Detector" to find out the results.

(Chart courtesy of tradeMONSTER)

Comments

[RiskReturnO...:]

XLE is oversold relative to crude oil. Perhaps long XLE hedged with short a crude oil ETF like USO could also do the trick.

Jun 25 08:15 PM