These three sector ETFs are trading at, or near, 52-week highs. That's a rarity, since many sectors are well below 2015 levels. The concept of trading the strongest sectors, and the strongest stocks within those sectors, is called relative strength. It compares the strength of one asset to another, favoring long positions in the stronger assets. Here are the sector ETFs that have been strong recently, and their outlook going forward.
The Consumer Staples Select Sector SPDR (XLP) is up 6.9% year to date (YTD), outpacing the SPDR S&P 500 (SPY), which is up 1.77% YTD. The prominent feature of the Consumer Staples chart is that it has moved well above 2015 highs, while the S&P 500 remains below 2015 highs. Consumer Staples is still showing strength, hitting a new high of $53.77 on April 4, and closing at $53.70 on April 6. Since early February, the price has run uninterrupted to the upside, without any significant swings lower. That is unsustainable, so while the ETF is strong, waiting for a pullback may prove prudent. Throughout the latter part of 2015, $51 was a resistance region. On a pullback, $51 is likely to provide support and a potential buy zone. The upside target on XLP is $55.60. The trade makes sense if the Consumer Staples sector is still outperforming most of its peers. If it isn't, the strongest sector performers at that time may present a better trading opportunity, with more upside.
The Technology Select Sector SPDR (XLK) is up 4.49% YTD. The ETF hit a high of $44.73 on April 4, just eclipsing the 2015 high of $44.65. A rally above $44.73 signals another pop higher in the price while a drop below $43.25 indicates a deeper pullback. The initial target is $46 for a break above $44.73. Over the long-term there is a much higher target at $50, based on the breakout of a multi-month range. That range warrants caution, though. If the price falls below $43.25, that multi-month range stays intact, and therefore the price could continue declining toward range support between $39 and $38.
The Utilities Select Sector SPDR (XLU) hit a high of $49.88 on April 1, edging past the December high of $48.63. It's up 13.16% YTD, with the ETF showing strength to the upside all year. As of April 6, the price has fallen from the high, closing at $48.61. The danger right now is the potential for a false breakout. After making a new high, the price quickly dropped back below the old high. That shows there is still resistance in this region.
When a price bumps up against resistance, it isn't necessarily a sell signal, or even a warning not to buy. There is a definitive uptrend in place in 2016, so that still favors longs, but preferably not right near the new highs. Instead, another potential entry area is at the rising trendline (for 2016), currently intersecting near $47.50. The initial upside target is $51. All the way down to $46 is a potential buying opportunity, but if the price starts dropping much below that there is a danger of it continuing to sink into the $43 to $42 region.
The Bottom Line
When looking for longs, relative strength is a factor to consider. It involves looking at the strongest sectors, and the stocks within those sectors, in an attempt to always be buying what is performing best. Unfortunately, nothing stays static in the markets for long. What is strong this month, may lag next month. And laggards eventually become leaders. Right now these sectors ETFs are quite strong (comparably), and therefore provide upside opportunity if certain trade conditions materialize. There are still risks, though. Watch for breaks below support to indicate possible reversals.
Disclosure: The author doesn't have positions in any of the ETFs mentioned.