In this report the goal of our sector allocation will be to tactically outperform the S&P 500 on a relative basis. We will adjust our portfolio weightings by maneuvering into leading sectors and shying away from the losers, at least from a technical perspective assuming a 3-6 month timeframe in mind.
My objective is to uncover the intermediate and long-term technical drivers while at the same time providing the tactical guidance required to navigate these ever-changing market conditions.
The Macro markets are still favoring U.S. equities via the S&P 500 (SPX) as investors have a tendency to gravitate towards the relative safety of the U.S. in times of uncertainty. The recent surge in the U.S. Dollar looks to be one glaring example. The Feb. 2013 positive outside month pattern and the move above the left shoulder of a 1-year head and shoulders top pattern suggests that investors may continue to flock into this area.
We are also seeing the striking relative outperformance of the SPX versus a number international/emerging equity markets as global money managers may be forced there in an attempt to beat their relative benchmarks. Although this can prop the SPX further still, it is not necessarily a foundation to build your home. With that said, sector rotation looks to be shifting out of some of the economically sensitive areas of the market like Energy, Materials, and Industrials. This will need to be monitored closely.
Technology Select Sector SPDR Fund (XLK) – XLK could be on the verge of another relative strength breakdown. This will be interesting if this is accompanied by price weakness as it alludes to the development of the right shoulder to a large head and shoulders top pattern. With that said, the left shoulder ( 30.62 ) represents initial supply, while the top of the 3/5/13 upside gap and the converged 50/150-day moving averages near 29.75 should act as initial support.
Financial Select Sector SPDR Fund (XLF) – There is debate as to whether the outperformance in this sector can continue. The technical evidence is not showing signs of sustainable money flows out of XLF and the breakout of a 3-year basing effort in Jan. 2013 suggest that this trend can sustain somewhat longer. In order to protect profits, trader support resides near 18 or the Feb. 2013 high. The Jan. 2013 breakout level and the Feb. 2013 low near 17.20 is secondary support.
Health Care Select Sector SPDR Fund (XLV) – The 1/6/13 and 3/3/13 positive outside weeks suggest that XLV is being accumulated. However, on an intermediate-term basis the weekly the Relative Strength Index is at extreme overbought levels. It is interesting that since the 2009 bottom, each time XLV has reached overbought levels on a weekly basis it has led to some kind of notable correction. Another pullback may represent the next buying opportunity
Consumer Discretionary Select Sector SPDR Fund (XLY) – The breakout above the Jan/Feb. 2013 highs quickly met its technical target near 53 . The ability to clear this resistance opens up the door for a move towards the top of the 2009 uptrend channel near 56 . On the other hand, it would take a violation of support at the recent breakout level of 51.23 to signal the onset of a deeper correction. Secondary support corresponds to the Feb. 2013 low ( 49.40 ).
Energy Select Sector SPDR Fund (XLE) – Not all that much has change for XLE since our last writing, but a steady decline in relative strength supports this week’s reallocation of funding out of the Energy Select Sector SPDR Fund (XLE). We have therefore reduced our exposure from +2%à0%. Initial resistance remains near 80-81 . A breakout could lead to an explosive rally as next resistance is into the low-90s .
Consumer Staples Select Sector SPDR Fund (XLP) –Another sharp move in relative strength, a breakout to new all-time highs, and the 3/24/13 positive outside week merit a reentry into XLP. Being four years into this cyclical bull market may also be hinting to a somewhat more defensive positioning by money managers. They may not love the market at these levels but need to be invested. Initial support rises to the Mar. 2013 low ( 38.20 ).
Industrial Select Sector SPDR Fund (XLI) – It is interesting how XLI slightly eclipsed its 2007 peak before pulling back. A convincing breakout could establish XLI as the next leadership sector. However, from a relative strength perspective XLI is undergoing some kind of bearish reversal as it has violated neckline support of a 3-month head and shoulders top. Given this technical backdrop and the goal of this portfolio the allocation has been adjusted from 0%à-1%.
Materials Select Sector SPDR Fund (XLB) – A large rising wedge pattern warns of a maturing trend. The bottom of the pattern and the Mar. 2013 low near 37.35 therefore makes a key level of support. On the other hand a move through the top of the pattern near 40 allows for a test of the Apr. 2011 high of 41.28 . From a relative strength perspective XLB has again sold off for much of the week, leaving it testing key support at the Sep. 2012 low.
Utilities Select Sector SPDR Fund (XLU) – Technical improvements have been occurring after the 12% Aug-Nov. 2012 decline as XLU has now retraced nearly the entire decline. In fact, a potental bullish flag on the daily chart suggests that XLU could be gearing up for a breakout above the Aug. 2012 high ( 38.54 ). This would have some technical significance as it opens the door for a move towards psychological supply ( 40 ) and then the May. 2008 high near 42 .
iShares US Telecom Index (IYZ) – The large 2/14/13 downside gap first warned of a weakening technical condition. This was followed up by two distribution patterns: the first was the 3/3/13 negative outside week and the second was a more significant Feb. 2012 negative outside month. Continue to monitor initial support at 23.61 or the Feb. 2013 low as this may correspond to a neckline support of a 4-month head and shoulders top.
J. Beck Investments is an independent provider of technical research for ETFs.