Leading Sectors and Asset Classes
Keeping up with leading sectors is an ongoing process. This is done by identifying how a specific asset class is performing relative to the market. For example, one can compare the S&P 500 index (NYSEARCA:SPY) to cash or iShares Barclays Aggregate Bond Fund (NYSEARCA:AGG) to determine whether the market is performing better than other less volatile asset classes. If equities are performing better than cash or bonds, then further comparison into the market versus other categories would be the logical progression. By drilling down further, the S&P 500 index can be compared to any number of other categories including, foreign versus US equities, or whether there is a particular sector that should be held or not.
The diagram below illustrates the categories that are in favor versus the S&P 500 Index. From this we can deduce a number of valuable insights including leading sectors and investments styles. Once leading sectors have been identified, it's only logical to continue drilling to identify leading equities within each sector. One important note, before moving on to the diagram, is that the S&P 500 Index recently turned negative against both bonds and cash. This was discussed in a recent article "The Lows Appear to Be In..." and will be closely monitored going forward.
There have not been any sector leadership changes since the report on 2/3/2016, That discussed when the Energy Select SPDR ETF (XLE) moved into favored status and the Financial Select SPDR ETF (XLF) moved out of favor (as of 1/29/2016). Utilities are continuing to remain strong at these levels and basic materials are being watched closely as they are not far from becoming positive.
Leading Sectors as of 2/8/2016
Energy: The Energy Select Sector SPDR ETF (NYSEARCA:XLE) and partial list of energy sector components include, NRG Energy, Inc. (NYSE:NRG), Schlumberger Limited (NYSE:SLB), Exxon Mobil Corporation (NYSE:XOM), Halliburton Company (NYSE:HAL), Concho Resources, Inc. (NYSE:CXO) are trading positively when compared to the S&P 500 index.
Industrials: The Industrial Select Sector SPDR ETF (NYSEARCA:XLI) and some of the leading components include, General Electric Company (NYSE:GE), 3M Company (NYSE:MMM), Honeywell International Inc. (NYSE:HON), Lockheed Martin Corporation (NYSE:LMT) are continuing to trade positively.
Consumer Discretionary: The Consumer Discret Sel Sect SPDR ETF (NYSEARCA:XLY) and a partial list of consumer discretionary components include, Scripps Networks Interactive, Inc. (NYSE:SNI), The Home Depot, Inc. (NYSE:HD), Time Warner Inc. (NYSE:TWX), Comcast Corporation (NASDAQ:CMCSA), McDonald's Corp. (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX), NIKE, Inc. (NYSE:NKE) are continuing to move positively on relative strength.
Consumer Staples: The Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) and a few selected components have been pretty solid. The following ideas are showing leadership within the sector: The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), Altria Group Inc. (NYSE:MO), Wal-Mart Stores Inc. (NYSE:WMT)
Technology: The Technology Select Sector SPDR ETF (NYSEARCA:XLK) is still in favor and a partial list of technology components include, Apple Inc. (NASDAQ:AAPL) Agilent Technologies Inc. (NYSE:A), Alphabet Inc. (NASDAQ:GOOG), SanDisk Corp. (NASDAQ:SNDK), Microsoft Corporation (NASDAQ:MSFT), and Facebook, Inc. (NASDAQ:FB)
Utilities: The Utilities Select Sector SPDR ETF (NYSEARCA:XLU) continues to be in favored status and Duke Energy Corporation (NYSE:DUK), American Electric Power Co., Inc. (NYSE:AEP), Southern Company (NYSE:SO), Dominion Resources, Inc. (NYSE:D), PG&E Corporation (PCG, Public Service Enterprise Group Inc. (NYSE:PEG), are some of the utility sector components.
Basic Materials: The Materials Select Sector SPDR ETF (NYSEARCA:XLB) has been showing signs of near term strength and is close to transitioning into favored status. Some basic material components include: iShares Silver Trust (NYSEARCA:SLV), SPDR Gold Shares (NYSEARCA:GLD), Monsanto Company (NYSE:MON), The Sherwin-Williams Company (NYSE:SHW), E. I. du Pont de Nemours and Company (NYSE:DD), Alcoa Inc. (NYSE:AA), AK Steel Holding Corporation (NYSE:AKS), and United States Steel Corp. (NYSE:X)
Dow Jones Transportation average: The Dow Jones Transportation Average (^DJT) or ($TRAN), iShares Transportation Average (NYSEARCA:IYT) have been exhibiting near term strength despite needing further gains before crossing over into favored status. A partial list of equities in the transportation sector include, United Parcel Service, Inc. (NYSE:UPS), Swift Transportation Company (NYSE:SWFT), and Union Pacific Corporation (NYSE:UNP),Out of Favor Sectors.
Financials: The Financial Select Sector SPDR ETF (NYSEARCA:XLF) is out of favor based on relative strength. Despite being in a sector that's out of favor, financial sector components that are moving positively include, The Allstate Corporation (NYSE:ALL), Banco de Chile (NYSE:BCH), Brown & Brown Inc. (NYSE:BRO), CME Group Inc. (NASDAQ:CME), Nasdaq, Inc. (NASDAQ:NDAQ), Oaktree Capital Group, LLC (NYSE:OAK), Federal National Mortgage Association (OTC:FNMAS)
Healthcare: The Health Care Select Sector SPDR ETF (NYSEARCA:XLV) is out of favor but, the healthcare sector has some components that are moving positively on relative strength, Bristol-Myers Squibb Company (NYSE:BMY), Mylan N.V. (NASDAQ:MYL), Johnson & Johnson (NYSE:JNJ), ResMed Inc. (NYSE:RMD), and Stryker Corporation (NYSE:SYK)
The Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) is a way to own the equally weighted S&P 500 index. Rather than own an index where the largest market capitalization stocks have the most effect on the index, RSP holds an equal amount of each component of the S&P 500 index. The RSP is positive against the S&P 500 and would be ideal to own during a broad market rally.
A different approach is the Guggenheim S&P 500 Top 50 ETF (NYSEARCA:XLG) is just like it sounds, it holds the top 50, market weighted components, of the S&P 500 index. This is a simple way to own the top components of the S&P 500 without having to follow or track multiple positions. Currently XLG, is positive against both the S&P 500 and the S&P 500 Equal Weight ETF. The top holdings (as of 02/05/2016) are Apple Inc.(NASDAQ:AAPL), Microsoft Corporation , Exxon Mobile Corp , Johnson & Johnson , General Electric , Berkshire Hathaway Inc (BRK/B), Facebook, Inc , AT&T, Inc (NYSE:T), Wells Fargo & CO (WFC), Proctor & Gamble , JP Morgan Chase & Co (JPM), Verizon Communications Inc (VZ), Alphabet Inc. (NASDAQ:GOOGL), Alphabet Inc. , Amazon.com, Inc. (NASDAQ:AMZN)
Security Selection for the Sector Leadership ETF's
The State Street "Spider" ETF's were selected for a number of reasons Including: The overall lower cost of the sector ETF's, ranging between .14% and .15% gross expense, they generally have a higher relative strength than many of their peers in the same category, and they have a longer range of historical data than many of their peers.
Guggenheim ETF's were selected due to their equal weighted ETF strategies being a good compliment to the "Spiders" Sector ETF's. The Guggenheim Equal Weight ETF's all have a gross expense ratio of .4% which is also lower than many of the peers in their respective category. Furthermore, they offer a number of other equal weight ETF's like the equal weight S&P 500 ETF which can be compared to the Spider SPY. The RSP, SPY and XLG are often compared to determine which style has higher relative strength.
The current focus is to determine which "Spider" sector ETF's are exhibiting positive relative strength when compared to the S&P 500. Later editions of this report will drill down deeper and compare, market weighted, equal weighted, and international sector ETF's so that an overall global sector allocation can be optimized.
Market Risk Meter
Potential Retest… Again!
The market is looking for new leadership and the process can be painful as some sectors, like energy and the financials, move in or out of favor, respectively. A little more time is needed to determine If the transports and basic materials will move back into favor but, there are some actionable ideas, even in out of favor sectors.
The proprietary Market Risk Meter is back in lower risk territory, again. Bullish investors are looking for a reversal day, similar to what we saw on Monday, February 8, 2016, and 2 to 3 strong follow-through days for confirmation of recent retests of the 2015 and 2016 lows.
These markets can go either direction in the short term but, a break below 15,666 in the Dow and ~1812 in the S&P 500 could crystallize that move to the downside. Conversely, if the bulls can find some traction here, by following through over the next 2 to 3 days, an upside test of the 2015 highs would not be completely out of the realm of possibilities.
Disclosure: I am/we are long FNMA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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