'Sector Detector' Update: XLE, XLK

By Mike Castino

This week's rankings have not changed since our last "Sector Detector" update, which discussed possible ways to trade the energy and technology sectors based on index ratings by Sabrient Systems.

As a result, last week's sector picks--long the XLE and short the XLK exchange traded funds--remain the same. The energy sector has the highest score of 74 and the IT sector has the worst score of 39, according to Sabrient's rankings. BUT, the financials sector is coming in a close second with a score of 40. You could therefore use the XLF in place of, or with, the XLK for your short sector pick(s).

Sabrient assigns a score of 0 to 99 to each sector, with 0 as the highest underperforming outlook and 99 as the highest outperforming outlook. Based on those rankings, we suggest possible long positions in the sector with the highest outperforming rating paired with short positions in the ETF with the highest underperforming outlook.

In our "Sector Detector" series, we have showed how you can use this information in three ways to identify ETFs that have the potential to enhance your upside, downside, or market-neutral trading ideas.

First, if you are bullish on the broad market, you can go long the S&P 500's SPY exchange traded fund and "enhance" it with a long position in the "highest" outperform"-ranked ETF.

Conversely, if you are bearish and you short the SPY, you could also consider shorting the "highest" underperform-ranked sector ETF to enhance your short bias.

Finally, if you really don't care which way the market is going, you could try a market-neutral, long/short trade--that is, long the outperforming ETF and short the underperforming ETF.

Now it's time to see how our most recent positions--long XLE and short XLK--did over the last week.

From June 23 to June 29, the XLE went from $47.03 to $48.34 and XLK from $17.68 to $18.35. Through Monday's close, an enhanced bullish position and a market neutral position would have been profitable; an enhanced bearish position would have been a loser.

The latest Sabrient rankings suggested staying long XLE and short XLK (and/or XLF). Today the XLK is down 2.3 percent to $17.87 in midday trading, but the XLE is also trading lower, by 3.35 percent to $46.48. The XLF, meanwhile, is down about 2 percent.

Check next week's "Sector Detector" for any ratings changes and to find out how these potential strategies are working.

(Chart courtesy of tradeMONSTER)