With the broader market declining in recent weeks, Consumer Cyclicals and Energy have seen the largest declines. While there are no guarantees these will continue to be the weakest sectors this week, recent price action warrants caution. Investors are leaving the sectors, at least in the short-term, for more conservative sectors such as the Utilities Select Sector SPDR (ARCA:XLU) as uncertainty continues. These weakened sectors may also provide shorting opportunities for short-term traders should selling continue this week.
Consumer Discretionary Select Sector SPDR (ARCA:XLY) is down 6% over the last month, making it the worst performing sector over that time frame. The ETF recently broke below a rising channel in place for the last seven months, and is challenging former swing lows at $62.25. A breach of that levels indicates a broader decline is still underway. While a pullback to the upside could occur before the target is reached, the next downside target is $60 to $59. If the price holds above $62.25 buyers may have enough strength to push the price back into the $65 area, before hitting resistance. A move back above the $66.85 indicates the uptrend is still intact, but should be followed by a higher swing low as well.
Polaris (NYSE:PII), a consumer discretionary stock, was performing very well until the start of 2014. Shortly after putting in a high of $146.99 the stock began it's recent decline. Weak volume on the final stages of the rise forewarned of potential weakness. The January 28 low at $122.25 is short-term support, but if tested it is likely to fail as the price continues to decline. The next support area, or downside target is $117 to $114. A raise back above $130 could trigger some short-term buying into $135. If looking for longer-term long positions, bulls should wait for the price to bounce and then form a higher swing low before speculating the price will re-test or exceed the $146.99 high.
Energy Select Sector SPDR (ARCA:XLE) made little upward progress since late October, but recently broke definitively through support in the $85 region. If the price bounces from here, $86 to $87 is likely to provide significant resistance. A drop below $83 on the other hand indicates another leg down is probable, with a target just above $81.
A hard hit stock in the energy space is Petroleo Brasileiro (NYSE:PBR) which has continually made new 52-week lows over the last week. Fibonacci targets are at $11, which is near the January 31 close, as well at $10.50. Those are necessarily potential bottoms, just targets based on recent price moves. Overall there isn't much for the bulls to get excited about. The price needs to get back above $14 before any sort of bullish case can be made, and then the rally should also be followed by a higher swing low.
The Bottom Line
The S&P 500 SPDR (ARCA:SPY) closed out near a support zone last week, indicating the trend is still up, but could turn if selling continues. With that uncertainty currently looming, and already having shown relative weakness and breaching support, the Energy and Consumer Cyclical sectors warrant particular caution in the present environment.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.