2 sectors that will keep beating the market: Technician
The market is having a tough time this year but a couple of sectors are outpacing the it. According to one technician, those sectors may be the place investors should put their money as volatility picks up.
“As the saying goes, ‘the best offense is a good defense,’” said Mark Newton, chief technical analyst at Greywolf Execution Partners. And a couple of defensive sectors have beaten the S&P 500 (^GSPC) so far this year.
Utilities are having a great start to 2016. The ETF tracking the sector (trading under the symbol XLU) is up nearly 8% since the year began, making it the market’s best performer. Newton expects that to continue.
By charting the price of the XLU divided by the S&P 500, he graphs the relative performance of the utilities to the overall market. Since 2008, that has been in a downtrend, indicating general underperformance in the sector. But recently, something changed.
“All of a sudden, just in the last 6 months, we've seen a dramatic period of outperformance with utilities, which is to be expected not only with concern about the recent volatility in the market, but also as yields have come down,” he said. “People are looking for some sort of a safe haven, and dividend hungry investors are turning to utilities. This is an interesting and bullish technical phenomenon that means utilities likely should outperform over the balance of 2016.”
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A chart of the consumer staples ETF (trading under the symbol XLP) versus the S&P 500 shows a similar breakout in a sector dominated by the likes of Procter & Gamble (PNG), Coca-Cola (KO), Philip Morris (PM), and CVS Health (CVS).
“Consumer staples have risen to the highest levels that they've been in over a decade,” Newton said. “This is also a very bullish technical development and means that investors are moving toward a lot of these staples.”
As uncertainty about the economy potentially holds off another rate hike from the Fed in the near-term, Newton sees these defensive sectors beating the market for some time to come.
“Investors are flocking to defense this year, which makes sense given the fact that yields have pullback,” he said. “The defensive sectors still look like hot performers for the balance of 2016.”
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