Sector Strength Scenarios For A Consolidating Market

By Cory Mitchell | December 09, 2013 AAA

The S&P 500 SPDR (ARCA:SPY) finished slightly lower last week, but held above support and jumped aggressively on December 6, indicating the potential for a market consolidation or a further run to the upside this week. The bias is to the upside based on the trend, but a failure to break above $181.75 signals this is a consolidation. A drop below $178 is short-term bearish. In which direction the breakout occurs will determine the short-term direction. From a longer-term perspective the S&P 500 is trading right near the high of a trend channel, so while the trend is still up, certain sectors are more appealing than others. Focus on strength when the price action is bullish, but if support is tested or breached there are two more conservative sectors which may weather the decline a bit better.

Technology Select Sector SPDR (ARCA:XLK) was the second best performing sector last week and deserves to stay on the radar this week. The December 6 close is right on the breakout point of last week's small consolidation. Follow-through higher early in the week is a positive sign over all. Upside targets are $35.05 to $35.15, with a further target at $35.30 to $35.40. Moving about $0.65 per week both targets are within range this week. If the price can't hold above $34.90 the small consolidation is still underway and upside targets are put on hold till the push higher occurs. A drop below $34.45 indicates some short-term selling pressure but no real technical damage occurs unless the price starts breaching other lows like the one the $33.86--unlikely this week.

Health Care Select Sector SPDR (ARCA:XLV) finished down just marginally last week, but has been such a solid performer over the last year that it remains a sector to be involved in. Following a small correction the price has bounced off a $54 support region. Moving on average $1.18 per week it is quite possible the ETF will eclipse the recent at $55.71 this week. Upside target is $55.30 to $55.35. Another target is $57.50, but that is likely a couple weeks away, assuming the price continues higher. An inability to post a new high signals the price is in a consolidation, but a drop below $54 means a deeper pullback is underway.

Consumer Staples Select Sector SPDR (ARCA:XLP) is a more defensive sector. It has had lower returns this year than the S&P 500 SPDR, but generally fairs a bit better when the market slides lower. With a small correction in the S&P 500 last week this sector showed a positive return, edging up 0.16%. For more than a month it has been trading within a consolidation, the low of which is $42.13 and the high $43.46. A rise above $43.25 breaks a minor downward sloping trendline indicating a re-test of the high. A move beyond the high is possible this week, but reaching the next target at $44.30 isn't as the price moves about $0.86 per week. A close below $42.13 means a topping pattern is in place and the price is likely to correct into the $40 range over the next several weeks to couple months.

Utilities Select Sector SPDR (ARCA:XLU) was the top performer last week, moving up 1.08%, but remains a laggard overall. With slightly more than double the dividend yield of the S&P 500 SPDR, Utilities is where investors traditionally transition during times of uncertainty. With the strong uptrend in other sectors though, putting in consecutive weeks of high-ranking performance has been a rare occurrence for the Utilities ETF. Until a more definitive down draft occurs in the S&P 500 this remains a defensive ETF play, which isn't likely to be most the lucrative.

There are positive signs though. The lows have been stepping higher as shown by the trendline and a short-term bottom looks have recently formed with the break above $38.25. If the trend holds--stays above $37.65--the price should slowly make its way back toward the $39.50 region. For those who are looking for a more defensive posture, this ETF offers some short-term upside potential, but in the event of a major market pullback offers a dividend yield which helps offset a small portion of the price decline.

The Bottom Line

The trend is still up for the S&P 500 and therefore playing the long-side in strong sectors is the prudent choice. The breakout direction from the current consolidation is likely to signal the short-term direction. The bias is up, but with the price at the very top of a long-term trend channel there is potential for a deeper correction over the coming weeks. Dividend heavy defensive sectors provide some potential shelter for investors if the market turns lower, but with few signs of that occurring just yet sticking with strength is the better play short-term traders.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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