Contributor Since 2010
Once the market bottoms, sector rotation could give rise to new market leaders, including a pair of sector ETFs that are now looking to rally off potential bottom formations.
Some analysts are looking for the weakest industry groups to become the new leaders once the market finally bottoms out. The iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) and the SPDR S&P Oil & Gas Exploration ETF (XOP) underperformed during the first-quarter rally and have been much weaker since the start of April. This makes these funds and their respective industry groups ones that should be watched closely.
Both funds reversed nicely alongside the stock market on Wednesday, but the volume and relative performance analysis needs to improve sharply to signal that an important low is in place. One looks attractive for a short-term trade, although longer-term investors should wait for more evidence before buying.
Chart Analysis: The percentage change chart shows the relative performance of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the Spyder Trust (SPY) along with the iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) and the SPDR S&P Oil & Gas Exploration ETF (XOP) since the start of April.
The iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) retested the resistance from the spring of 2011 in the $60 area, line a, in March before turning lower.
The daily chart of the SPDR S&P Oil & Gas Exploration ETF (XOP) shows that the fund made marginal new highs on March 19 at $61.81, line f, before reversing to the downside.
What It Means: Both of these oversold ETFs reversed from their early lows on Wednesday to close higher for the day. This suggests that a short-term bottom may be in place, and the volume did pick up on the buy side.
The relative performance analysis does not yet indicate that a sustainable low is in place, but a decent rally is now likely. A very strong rally could form the basis for a sustainable bottom formation.
How to Profit: Short-term traders could buy the SPDR S&P Oil & Gas Exploration ETF (XOP) at $49.06 or better with a stop at $46.93 (risk of approx. 4.3%). If longs are established, sell half the position at $52.26 or better for a 6.5% profit and raise the stop to breakeven.
Cancel the order if $50.40 is hit first or if this order if not filled by the close on May 25.