Regular readers will know that I recently turned more positive short-term on U.S. equities (see Ending in tears doesn't mean that the market goes down right away and Complacency? Don't worry, be happy!). Based on that assumption and my past research indicating that in a bull phase, traders should focus on high momentum stocks and sectors for their long positions (see Momentum + Bull market = Chocolate + Peanut butter), I offer the following sector and industry ETF suggestions for traders. These ETF suggestions are based on my sector and industry momentum screens and I would caution that some of the ETFs are correlated with each other, so it may not be appropriate to overly weight any two correlated sectors or industries.
Energy Select Sector SPDR ETF (NYSEARCA:XLE)
Here is the relative performance chart of XLE to the SPDR S&P 500 Trust ETF (SPY). As the chart shows, Energy stocks have moved to a leadership position in the last few months. The sector got a little over-extended and has pulled back on a relative basis. Current levels may provide a good entry point for long positions.
iShares MSCI Canada ETF (NYSEARCA:EWC)
One surprise that came out of my relative strength and leadership screen were Canadian stocks. As Canadian stocks are more heavily weighted in the resource sector and in energy in particular, EWC is somewhat correlated to XLE and therefore partly represents the energy overweight theme that I mentioned above. On the other hand, EWC is a more broadly diversified index with other sector exposures and it may represent a less risky way of taking an energy overweight position than a simple long position in XLE.
Market Vectors Semiconductor ETF (NYSEARCA:SMH)
Recently I have questioned the lack of capital expenditures. Many capital goods producing companies have either lagged or only kept pace with the market, which made me question the strength and sustainability of the economic rebound. However, the cyclically and capital goods sensitive semiconductor industry has been a notable exception. While the group is a bit over-extended on a relative basis and could pull back at any time, semiconductors represent a solid momentum pick for bullish traders.
Technology Select Sector SPDR ETF (NYSEARCA:XLK)
The semiconductor stocks are a subset of the Technology sector and their performances are correlated, but Tech stocks recently staged a relative upside breakout in the context of a relative uptrend.
iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)
The poster child for risk appetite is back! Biotechology stocks got clobbered in March and early April, but they have gradually recovered. This is an indication that the animal spirits of risk appetite is returning. If you are a bullish trader, IBB could be your vehicle.
In conclusion, it looks like the bulls are running again. Despite some obvious fundamental risks, my inner trader has turned to the Dark Side and he is running with the bulls. Some of the sectors and industry ETFs that I mentioned are prime candidates for long positions for bullishly inclined traders.
The usual caveats about risk applies here. Keep your stops tight if you enter positions.
Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.