Trading Sector ETFs Instead of Specific Stocks

TheStreet.com

NEW YORK (TheStreet) -- Investing in sector exchange-traded funds is a way to allocate assets to a stock market segment without having running the risk of picking individual names.

During this third-quarter earnings season, more stocks than usual have been sent to the woodshed with price declines on missed revenue or profits, or even disappointing guidance. Investors choosing to stay with a stock after its been driven downward must decide whether the company in question warrants a longer term approach. It's safe to say that Wall Street downgrades on disappointing earnings are likely to push shares down even further.

The adverse affect on ETFs that hold a woodshed stock is dampened by the other stocks in the sector ETF.

An ETF is an alternative to investing in equity mutual funds. ETFs trade just like a stock, which provides a huge advantage over mutual funds. You can employ my buy-and-trade strategy to ETFs to capture a portion of up and down volatility, but a mutual fund cannot be traded intra-day.

If you wish to allocate assets to certain sectors you can choose from the 11 popular ETFs I am profiling today. On Oct. 8 I wrote Tracking Sector ETF Bubble Characteristics and since then buy-and-trade investors could have bought eight of the 11 ETFs on weakness to the value levels shown in that table. On the flip side five of the 11 could have been sold on strength to the risky levels shown in that table.

Between the Oct. 7 closes and the Tuesday closes these ETFs gained between 3.4% and 8.6%. All 11 have price gains over the last 12 months between 12.3% and 41.2%. All 11 are above their 200-day simple moving averages.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

iShares U.S. Consumer Services ($116.04 vs. $109.46 on Oct. 7) set a new multi-year high at $116.97 on Nov. 6. Buy-and-trade investors could have bought this ETF at $107.42 on Oct. 9 and sold it at $113.96 Oct. 24. My semiannual value level is $109.96 with a weekly pivot at $117.08 and monthly risky level at $119.45.

iShares Transportation Average ($126.89 vs. $116.88 on Oct. 7) set an all time high at $127.61 on Nov. 6. Buy-and-trade investors could have bought this ETF at $116.77 on Oct. 8 and sold it at $121.99 on Oct. 18, then sold an additional amount at $127.00 on Nov. 4. My monthly value level is $122.42 with a semiannual pivot at $127.00 and quarterly risky level at $127.95.

Materials Select Sector SPDR ($44.03 vs. $42.03 on Oct. 7) set a multi-year high at $44.36 on Oct. 30. Buy-and-trade investors could have bought this ETF at $41.16 on Oct. 9. My monthly value level is $43.27 with a weekly pivot at $44.44 and semiannual risky levels at $45.79 and $46.05.

Energy Select Sector SPDR ($85.91 vs. $83.05 on Oct. 7) set a multi-year high at $87.62 on Oct. 30. Buy-and-trade investors could have bought this ETF at $82.19 on Oct. 8 and added to this position at $81.91 on Oct. 9. My semiannual value level is $81.91 with a monthly pivot at $85.96 and semiannual risky level at $88.35.

Financial Select Sector SPDR ($20.67 vs. $19.82 on Oct. 7) set a multi-year high at $21.04 on Oct. 22. Buy-and-trade investors could have bought this ETF at $19.60 on Oct. 8. My semiannual value level is $19.70 with a weekly pivot at $20.90 and monthly risky level at $21.71.

Industrial Select Sector SPDR ($49.36 vs. $45.95 on Oct. 7) set an all time high at $49.52 on Nov. 7. Buy-and-trade investors could have bought this ETF at $45.93 on Oct. 8 and could have sold it at $49.14 on Nov. 4. My semiannual value level is $43.08 with a semiannual pivot at $49.14 and quarterly risky level at $50.44.

Technology Select Sector SPDR ($34.03 vs. $32.04 on Oct. 7) set a multi-year high at $34.10 on Nov. 7 and retested on Nov. 12. This ETF did not test any of my Oct. 8 value levels or risky levels. My annual value levels are $27.22 and $26.24 with a monthly pivot at $34.01 and semiannual risky levels at $34.77 and $34.82.

Consumer Staples Select Sector SPDR ($42.61 vs. $39.68 on Oct. 7) set an all time high at $43.10 on Nov. 6. Buy-and-trade investors could have sold this ETF at $42.35 on Oct. 28 and at $42.91 on Oct. 31. My semiannual value level is $37.76 with a semiannual pivot at $42.35 and monthly risky level at $43.22.

Utilities Select Sector SPDR ($38.61 vs. $36.97 on Oct. 7) set a multi-year high at $41.44 on April 30, when it was the best performing ETF year to date. The all time high is $44.66 set in December 2007. This ETF did not test any of my Oct. 8 value levels or risky levels. My monthly value level is $38.02 with a weekly risky level at $39.41.

Health Care Select Sector SPDR ($53.26 vs. $50.65 on Oct. 7) set an all time high at $53.50 on Oct. 30. Buy-and-trade investors could have bought this ETF at $50.09 on Oct. 8. My semiannual value level is $47.93 with a weekly pivot at $53.09 and quarterly risky level at $53.85.

Consumer Discretionary Select Sector SPDR ($63.28 vs. $60.12 on Oct. 7) set an all time high at $64.20 on Nov. 6. Buy-and-trade investors could have bought this ETF at $59.24 on Oct. 8 and sold it at $63.06 on Oct. 25. My semiannual value level is $61.27 and monthly and quarterly risky levels at $65.69 and $65.76.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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