Which is the Best S&P Sector to be Overweight?

August 12, 2014 9:55 AM

With the S&P500 stuck right in the middle between important support and resistance levels, I think right now is probably best to remain neutral towards US equities from a tactical perspective. One of the ways we take advantage of what I think is going to be a lack of trend over the next 6-8 weeks is to put on pair trades that can add to the bottom line while maintaining a neutral stance in the asset class.

I figured now would be as good of a time as any to go over the relative strength for each of the S&P sectors. Here are the SPDR ETFs using 4-year line charts and a 200 day moving average to help define the trends. I kept them very clean and simple so we can really focus on just price and trends.

The first three charts: Materials, Energy and Technology appear to be going through bearish to bullish reversals. Materials look to be just breaking out while Tech is already more mature in this reversing process. Energy is somewhere in the middle. But on a relative basis, these 3 looks great. Materials are my favorite.

Materials vs S&P500:

8-11-14 xlb vs spy

Energy vs S&P500

8-11-14 xle vs spy

Technology vs S&P500:

8-11-14 xlk vs spy


Financials have been underperforming the S&P500 consistently for over a year. This isn’t a good thing for the overall stock market as Financials are one of the more important sectors where we look for leadership. The fact that they’ve been lagging is, in my opinion, an unsustainable divergence. Something’s gotta give, either S&Ps come down and correct, or financials pick up the pace. Unfortunately there is zero evidence of financials starting to outperform, at least not yet.

Financials vs S&P500:

8-11-14 xlf vs spy

Consumer Staples are another problem child of this market as they have also been underperforming for over a year. This isn’t somewhere we want to be overweight. I would wait for a bottoming process (maybe similar to materials) before getting more optimistic about this space.

Staples vs S&P500:

8-11-14 xlp vs spy


The next two are former leadership groups that have gotten hit hard on a relative basis. Both Industrials and Consumer Discretionaries were darlings of the 2013 rally. But recently they’ve struggled; breaking trends and now allowing their 200 day moving averages to roll over. Structurally we prefer to stay more neutral in both of these areas, at least for now. I’m not sure they will keep declining, but I find it hard to believe they will emerge as new leaders any time soon.

Industrials vs S&P500:

8-11-14 xli vs spy


Discretionaries vs S&P500:

8-11-14 xly vs spy


Utilities are still a disaster relative to the S&P500 and I think more time is necessary if this is part of a bottoming process. I’m going to need to see more out of these guys before getting aggressively overweight this space. I’d stay away and just wait.

Utilities vs S&P500:

8-11-14 xlu vs spy

And finally healthcare. This one is still in a strong uptrend and there is little evidence that the bull run has ended. I would look for a break in this uptrend line and/or break of the 200 day moving average as warning signals for this group. But so far we haven’t seen that.

Healthcare vs S&P500:

8-11-14 xlv vs spy

I try to review each sector on a consistent basis looking at both the price charts and the relative strength. This helps us, not only keep a neutral positiion towards stocks, but also helps with idea generation and what stocks and sectors to focus my attention on. Right now, it’s the materials that stand out to me the most.


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