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6 Picks In Seasonally Strong Sectors

|Includes: DV, eBay Inc. (EBAY), FHN, WAL, XLF, XLV, XLY

It has already been a much different stock market in 2014 than it was in 2013. The Spyder Trust (SPY) moved sideways until the latter part of January before dropping almost 6% in just 11 days. The rally from those lows has pushed the SPY almost 8% higher as the market waits for the latest FOMC announcement. The new high in the NYSE A/D line on Tuesday is a bullish sign for the market.

These wide swings are what I was expecting this year as it is more like the price action of 2012. The correlation between individual stocks and the S&P is also mush different this year as it has dropped sharply. Until the latter part of last summer, most stocks moved with the market pushing the correlation close to 1.0. In early January, the 65-day average had dropped to 0.52, well below the three-year average.

This is a plus for stock pickers and it is equally important that you look for stocks in the best sectors. There are three sectors that I like, which are typically strong seasonally until late April and May. In this week's trading lesson, I would like to take a seasonal and technical look at these sectors and review six specific recommendations. (Editor's Note: many were tweeted before the opening on March 19, 2014).

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The January correction hit the Select Sector SPDR Consumer Discretionary (XLY) hard as it dropped from a high of $66.85 to a low of $61.03. The rebound has been equally sharp as XLY recently made a new high of $67.85. The seasonal analysis shows that XLY forms a major bottom on or around October 11 (line 1) and then rallies up through January 10.

The next seasonal low typically comes in late February as XLY then rallies sharply until the end of April, line 2. Last year, XLY had a six-week correction from the spring high to the June low and then continued to move higher and higher into the end of the year.

This seasonal tendency is one of many that are included in John Person's latest book Mastering the Stock Market. John suggested I look at the department stores, which have a strong seasonal trend into the end of April. He also mentioned that the last quarter of employment data reflected an uptick in female employment that could add support to retail stocks that focus on women's apparel.

The chart of the department store group typically bottoms on October 25 and then tops on April 25. Given the fact that the weather has prohibited many from shopping, I would not be surprised to see them stay strong until early summer. I am looking for similar demand to hit all of the retail space in the next few months.



The SPDR S&P Retail ETF (XRT) has 101 different retail companies but the top 10 holdings only makes up 12.5% of the portfolio so it is quite diversified. These stocks include everything from Expedia, Inc. (EXPE) to O'Reilly Automotive (ORLY).

The chart shows that the daily downtrend, line a, is now being tested as it bounced off the 20-day EMA. There is stronger support for April at $83.82, which is the tentative 2nd quarter pivot. The daily downtrend in the relative performance (line c) was broken in late February as the RS line hit long-term support in early February, line d.

The daily OBV is trying to hold above its rising WMA and has key resistance at line e that needs to be overcome to signal an upside breakout. The weekly OBV (not shown) made a new high two weeks ago and is acting stronger than prices as it is well above the late-2013 highs. Once above $87.39, there is further resistance at $88.40-$88.80 with the quarterly projected resistance at $95.12.

Recommendation: Should be 50% long the SPDR S&P Retail ETF (XRT) at $86.53 as per 3/19 tweet. I would add 50% long at $85.92 with a stop at $82.57 (risk of 4.2%).

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eBay, Inc. (EBAY) has one of the best charts in the sector. The stock has been in the news quite a bit lately as investors are complaining about the direction that management is taking the company. The weekly chart shows that it broke out of a 16-month trading range (lines 1 and 2) four weeks ago and is now retesting the breakout level.

The 38.2% Fibonacci support at $56.72 was tested last week. The 50% support is at $55.82 with the more important 61.8% support at $54.92. The stock is now trading around the monthly pivot at $56.84. The 20-week EMA is at $54.82.

The higher lows in the relative performance suggested that it was bottoming. The break of the downtrend confirms this conclusion as the RS line is above its rising WMA. The dally RS line (not shown) did confirm the recent highs and is now just below its WMA.

The weekly on-balance volume (OBV) broke through its resistance in January and is now well above the early-2013 highs. It is acting stronger than prices and is well above its rising WMA. The daily OBV also confirmed the upside breakout and made a new high in early March.

The daily starc+ band is now at $59.42 with the weekly at $61.71. The upside target from the trading range is in the $66-$67 area.

Recommendation: Tweeted at 12 noon on 3/20: For eBay, Inc. (EBAY), should now be 50% long at $57.04 or better, and I would add 50% at $56.36 with a stop at $54.54 (risk of approx. 3.8%.

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Devry Education Group (DV) is a global education provider that has a market cap of $2.6 billion. The stock hit a high of $42.72 about three weeks ago as the daily starc+ band was tested. It has now dropped back to the 20-day EMA at $40.03 with the monthly pivot at $39.53. Based on current data, the pivot next quarter will be in the $39.12 area.

The daily relative performance made a new high with prices and is currently just below its WMA. The RS line shows a positive pattern of higher highs and higher lows. The weekly RS line shows a gradual uptrend consistent with a stock that is outperforming the S&P 500.

The daily OBV has also dropped slightly below its WMA but volume has declined as DV has corrected, which is a positive sign. The OBV did stage an impressive breakout in February as it moved sharply above the resistance at line h. The weekly OBV has just pulled back to its gradually rising WMA.

The major 50% Fibonacci retracement resistance from the 2010 high ($71.71) is at $44.87 with the 61.8% resistance at $51.28. The short-term 50% retracement support is now at $38.39.

Recommendation: Should be 50% long Devry Education Group (DV) at $40.48 as per 3/19 tweet. I would add 50% long at $39.86 with a stop at $38.09 (risk of 5.2%).

At this point, I do not see any opportunities in the strongest department stores but there are several other consumer discretionary stocks, like Walt Disney Co. (DIS) in the Charts in Play portfolio.

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The Select Sector SPDR Financial (XLF) typically bottoms on March 7 (line 1), then has a very strong rally into the end of April (line 2). The weekly chart shows that XLF was in a strong uptrend for most of 2013. The seasonal pattern for XLF is a bit more choppy as there is typically a rally into the end of the year and then a drop in the first two months.

The weekly relative performance for XLF (not shown) peaked last August and has since been in a gradual downtrend. The RS line is very close to breaking this downtrend, which would be a bullish sign. The weekly OBV made a new high in the first week of March and is acting stronger than prices.

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In the financial sector, the regional banks are one of the strongest groups. First Horizon National (FHN) is a regional southeast bank holding company that has a current yield of 1.7%. The weekly chart shows that it moved above its resistance at line a on Wednesday, and by mid-day Thursday (3/20), has convincingly broken out to the upside. A completion of the trading range, lines a and b, will give upside targets in the $14.50-$15 area.

The weekly relative performance shows what appears to be a completed bottom formation, line d, as it has moved well above its WMA. A strong move above the resistance at line c will confirm that it is a market leader.

The weekly OBV did make a new low early in the year and is now edging back to its WMA. The OBV has key resistance at line e. The daily technical studies (not shown) do look quite positive.

Recommendation: Should be 50% long First Horizon National (FHN) at $12.13 as per the 3/19 tweet as Wednesday's low was $12.12. I would add 50% long at $11.88 with a stop at $11.57 (risk of 3.6%).

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Another regional bank that I like is Western Alliance Bancorporation (WAL), which is a Pacific bank holding company. The stock has been in a trading range, lines a and b, since last November. It spiked to a high of $25.26 after it was mentioned in the press but the key resistance now seems to be in the $24.56-$24.74 area. An upside breakout would project a move to the $28.50-$30 area.

NEXT PAGE: Picks in Healthcare

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.