Sector Momentum in Materials, Transportation

Includes: IYM, IYT, OIH, USO, WMH, XLB
by: Nick Perry

Nick Perry (Schaeffer's Investment Research) submits: Last week we saw a continuation of positive momentum as most of the ETFs I track gained ground. This week we find that the good times continue:

click to enlarge
etf performance

Just over 85 percent of my list headed higher this week, with the SPDR-Materials (NYSEARCA:XLB), iShares DJ Transportation Average (NYSEARCA:IYT), iShares DJ U.S. Basic Materials (NYSEARCA:IYM), and Wireless HOLDRS (NYSEARCA:WMH) taking the lead. Outside the "industrial" type of funds, we also find a smattering of technology-related funds gaining ground. The bottom half of the list is composed mainly of energy and realty funds, with the Oil Service HOLDRS (NYSEARCA:OIH) and US Oil Fund (NYSEARCA:USO) the weakest.

A look over the charts below adds to an interesting trend. For the last few weeks we have seen that the top performing funds are typically in overbought territory. At first blush that might not seem too extraordinary but I think it hints to the underlying nature of how traders might be gravitating toward momentum type trades. In other words, we aren't seeing money flow to lagging groups, but to groups that were already showing some momentum. I realize that some of this is to be expected, after all, the broad market indices are trading near their annual highs, but still thought it was worth mentioning. Momentum markets can run for sometime, but they require you to be nimble. (Note - details about the indicators used in these charts can be found at the bottom of this column.)

etf performance

etf performance

Each chart features the 50-day moving average and a 9-day relative strength index (RSI). I use the moving average (the green line) as a simple way to gauge trends and the RSI (red line below the price) suggests whether the ETF is overbought or oversold. (More information about using the RSI can be found here.)

Index performance for the week:

index performance