Sweet Summer Sectors

By MoneyShow.com | June 25, 2011 AAA

Health care, consumer staples, and utilities have led the market this quarter, and another sector is now emerging as a strong buy for the summer months as well.

It has been a rough quarter for the stock market with the S&P 500 down 3.2% as we head into the end of the second quarter. The market’s sharp reversal on Thursday was a positive sign from a technical standpoint, however.

Now, a close above last week’s highs in the S&P 500 (1292.50) and 12,120 in the Dow Industrials would be a very positive sign. It would suggest a rally into the end of the quarter.

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As shown in the table above, only three of the major sector ETFs are currently showing gains for the quarter. The Select Sector SPDR - Health Care (XLV) is up 6%, followed by the 3.1% gain in the Select Sector SPDR - Consumer Staples (XLP), and the Select Sector SPDR - Utilities (XLU) is up 2.6% so far this quarter.

The two worst-performing sector ETFs are the Select Sector SPDR - Financial (XLF) and Select Sector SPDR - Energy (XLE), down 9.4% and 9.3%, respectively. Two of the other formerly leading sectors have also not done well this quarter, with the Select Sector SPDR - Materials (XLB) down 5.8% and the Select Sector SPDR - Industrial (XLI)
down 4.3%.

For the year, the results are even more dramatic with the Select Sector SPDR - Health Care (XLV) up 11.4%, while the Select Sector SPDR - Financial (XLF) is down 6.9%. The energy sector led in the first quarter, moving up 16.8%, but it has since retreated and now shows only a 5.9% gain for the year.

So which sectors look best for the summer months? My recent favorites, health care and consumer staples, still look good, as they have corrected back to initial support. Early in the month, I also profiled utilities, and there is now another sector whose improving relative performance, or RS analysis, suggests that it may become a new market-leading sector.

NEXT: See the Standout Sectors for Summer

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Chart Analysis: The daily chart of the Select Sector SPDR - Health Care (XLV) shows that the 38.2% support level was tested twice this week. The sharp rally from this support on Thursday was a positive sign.

  • Minor resistance now stands at $35.20-$35.60 and a close above this level will suggest that a bottom is in place
  • Once above the previous highs at $36.57, the next upside target is in the $37.20 area
  • The daily RS analysis has held firm recently and is still in a short- and longer-term uptrend, line a
  • Volume was heavy on Thursday, and the daily on-balance volume (OBV) is below its weighted moving average (WMA) and the resistance at line b. The weekly OBV (not shown) confirmed the recent highs and is positive for the intermediate term
  • If the recent lows are broken, the 50% retracement support is at $34.05

The Select Sector SPDR - Energy (XLE) had a wide range on Thursday, posting a low of $70.45 and a high of $72.40. Despite the plunge in crude oil prices, XLE closed near the highs. The heavy volume suggests a possible short-term selling climax.

  • The daily chart still looks negative with the short-term downtrend, line c, at $74.77 with more important resistance at $77.66
  • The RS is still in a short-term downtrend, line e, which indicates that the energy sector is underperforming the S&P 500
  • The longer-term uptrend in the RS (line d) was broken in April, which warned that it was giving up its leadership role
  • The daily OBV did not break below support, line f, until May, but the weekly OBV (not shown) did not confirm the highs early in the year, as a weekly top for oil was completed in May (see “Big Oil's Big Top”)
  • The major 38.2% support is at $69.50 with the 50% support at $67.70

NEXT: More Hot Sector ETFs This Summer

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The Select Sector SPDR – Consumer Discretionary (XLY) came very close to the weekly Starc- band last week and looks ready to close higher this week, which would be positive.

  • Initial support is now at $37.38-$37.52 with more important support from the May 2010 highs at $36.35, which also corresponds to the 38.2% support level
  • The weekly RS should close above resistance at line b this week, which would be a positive sign for the sector. The RS has been in an uptrend since April, line c
  • The daily RS (not shown) has also broken out to the upside
  • The weekly OBV has moved back above its weighted moving average, as volume has picked up over the past two weeks. The daily OBV is positive

The Select Sector SPDR – Technology (XLK) is down 4.2% for the quarter and is slightly in negative territory for the year. The recent action for this sector has been encouraging, as the tech sector was leading the market on Thursday.

  • The weekly chart shows that over the past two weeks, XLK has been close to the Starc- band, which is currently at $24.12. This week’s low so far has been $24.34
  • There is important chart support, line d, in the $24 area with next support at $23.50
  • The RS analysis is still negative even though it has turned up sharply. The RS broke important support (line f) in March. It is still below the breakdown level and the downtrend, line e
  • The weekly OBV has been below its weighted moving average since March and violated its uptrend, line g, in May

What It Means: The technical action in the health care (XLV), consumer staples (XLP), and utilities (XLU) sector ETFs suggests that the worst of the selling in these sectors may be over. We do not yet have confirmation that the stock market has completed its correction, so new correction lows over the next week or so are still possible.

Still, the technical and sentiment picture suggests that we are close to a market bottom. I would expect these three sectors to hold up the best if we get another drop, and lead the market higher once a new rally phase begins.

The improvement in the technical outlook for the Select Sector SPDR – Consumer Discretionary (XLY) is also an encouraging sign for the economy, as it suggests that consumer confidence and spending may start to improve. The fund looks attractive for new purchases.

Aggressive traders could look to the tech sector, and despite the weak earning reports on Thursday, the tech sector overall is likely to show the best earnings in July.

How to Profit: For new positions, I would buy the Select Sector SPDR – Consumer Discretionary (XLY) at $38.66 with a stop at $36.22 (risk of approx. 4.5%).

Earlier in the week, I updated my recommendations on the other key sector ETFs, and several of those new orders were filled on Thursday:

Select Sector SPDR - Health Care (XLV): Thursday’s low was $34.63. Buyers should now be 50% long at $35.14 and 50% long at $34.96 with a stop at $33.92.

Select Sector SPDR - Consumer Staples (XLP): Buyers should be 50% long at $31.12 and should have added a 50% long position at $30.96 or better on Thursday when the low was $30.58. Keep the stop at $30.54.

Select Sector SPDR - Utilities (XLU): Buyers should be 50% long at $33.16 and 50% long at $32.86 with a stop at $31.88.

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