As we head into the end of the year, Moneyshow's Tom Aspray reviews the year's top performing sectors and looks at the current technical readings to spot the best sectors for new investing.
Last week's action in the Dow Industrials and S&P 500 was positive but as I noted in Friday's Week Ahead market review even higher prices and very strong readings from the market internals are needed to signal upward acceleration.
The importance of sector selection was emphasized last week because while the Spyder Trust (SPY) gained just 0.2%, the Select Sector SPDR Financial (XLF) was up an impressive 1.7%. On the downside the Select Sector SPDR Materials (XLB) dropped 1.8% for the week.
So far in 2012, two of the sectors are up over 20% with the Select Sector SPDR Financial (XLF) gaining 23.2% and was closely followed by the Select Sector SPDR Consumer Discretionary (XLY), which is up 21.5%. Both have sharply outpaced the 12.8% gain in the Spyder Trust (SPY).
The 4th quarter drop of 6.7% has cut into the performance of the Select Sector SPDR Technology (XLK) as it is now up just 13% for the year. At the September highs, XLK was up 23%.
Using the multiple time frame relative performance analysis, one can identify those outperforming sectors as well as which sectors have the best potential as we head into 2013.
- The weekly chart shows that the downtrend from the 2011 high, line a, is now at $16.37 with the September high at $16.44.
- The 2010 and 2011 highs in the $17.20 area represent the next major resistance.
- The relative performance or RS analysis has turned up from its WMA and the uptrend is line c.
- This reaffirms the breakthrough major resistance, line b, and the completion of a significant bottom.
- The weekly OBV just barely violated its uptrend, line d, on the recent correction.
- The OBV did confirm the recent highs.
- The November correction stopped in between the 38.2% and 50% Fibonacci support levels.
- There is minor support now in the $16.60-80 area.
The Select Sector SPDR Consumer Discretionary (XLY) peaked in September at $48.01 and then dropped to a low of $44.66. This was a classical Fibonacci retracement as the correction held just below the 50% support at $44.72.
- The 127.2% Fibonacci retracement target and the upper trend line are in the $49-$49.20 area.
- The daily relative performance turned higher in early November as XLY was still declining.
- This indicated that XLY was not falling as fast as the S&P 500, which was a sign of strength.
- The daily OBV tested good support in November, line i, and has moved back above its WMA.
- The weekly RS line (not shown) is acting stronger than prices while the OBV is lagging.
- There is initial support now in the $46.50-$46.80 area with more important at $45.69.
The Select Sector SPDR Health Care (XLV) has been a favorite sector for most of the year as it has been up every quarter and currently shows a 16.7% gain for the year. The correction in November held above the 50% retracement support.
- XLV broke through the trendline resistance in October, line a, that connects the 2010 and 2011 highs as it peaked at $41.40.
- Once above the previous high, the 127.2% Fibonacci target is at $42.25.
- The last two major weekly rallies have averaged $6.17, which when added to the November low of $38.48 gives an equality target of $44.65.
- The relative performance is positive as it tested its long-term uptrend, line c, in the middle of September and moved back above its WMA when XLV was peaking.
- The weekly on-balance volume (OBV) tested support, line d, on the correction and closed back above its WMA last week.
- There is initial support in the $39.80-$40 area and then stronger in the $39.20 area.
- The November correction held above the 61.8% support at $35 and the downtrend, line f, was broken late last week.
- There is next strong resistance in the $38 area with the all-time highs from 2011 at $38.98.
- The daily relative performance broke its downtrend, line h, at the start of November just before the final wave of selling took XLI to its correction low.
- The RS line shows a positive pattern and is above its WMA.
- The daily OBV completed a base formation just before Thanksgiving as it broke through the resistance at line i.
- There is minor support now at $37-$37.30 and then further at $36.60
- On new position the tightest stop would be just under $35.50.
What it Means: Of the four sectors, the Select Sector SPDR Consumer Discretionary (XLY) is probably the most vulnerable to a sharp correction given the fragile nature of the consumer. The sharp drop in the preliminary consumer sentiment reading last Friday is a short-term negative.
For new positions, the Select Sector SPDR Financial (XLF) and Select Sector SPDR Industrials (XLI) look the best.
How to Profit: Those not already long XLF could go 50% long the Select Sector SPDR Financial (XLF) at $15.92 and 50% long at $15.68, with a stop at $15.29 (risk of approx. 3.2%).
For the Select Sector SPDR Industrials (XLI), go 50% long at $37.02 and 50% long at $36.73, with a stop at $35.38 (risk of approx. 4%).
For the Select Sector SPDR Health Care (XLV), go 50% long at $40.04 and 50% long at $39.76, with a stop at $38.42 (risk of approx. 3.8%).
For the Select Sector SPDR Consumer Discretionary (XLY), go 50% long at $46.88 and 50% long at $46.26, with a stop at $44.42 (risk of approx. 4.6%).
Portfolio Update: Investors should be long the Select Sector SPDR Financial (XLF) at $14.40, with a stop at $14.77.
You should also be long the Select Sector SPDR Health Care (XLV) at $36.14, with a stop at $38.42.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.