Weekly ETF SPY: XLV – Head-and Shoulders Above Other Sectors

The Health Care Select Sector SPDR ETF (XLV) sports the second best year-to-date performance. Recent price action has exposed a key short-term support level that can be used as a trigger level for investors looking to short the health care sector.

The Health Care Select Sector SPDR’s (XLV) performance ranks head-and shoulders above the rest. XLV is up 19.19% year-to-date, outperformed only by utilities (XLU is up 19.66%).

Other double-digit year-to-date performers include the Consumer Staples Select Sector SPDR (XLP – 17.89%), Consumer Discretionary Select Sector SPDR (XLY – 15.46%), Financial Select Sector SPDR (XLF – 14,48%) and Energy Select Sector SPDR (XLE – 10.08%).

Technology (XLK), industrials (XLI) and materials (XLB) are stuck in single digit performance territory.

Looking at the performance (and possible cracks) of leading sectors often provides clues for the overall stock market. Prior ETF SPY’s identified key support for other leading sector ETFs like the iShares Russell 2000 ETF (IWM) and SPDR Retail ETF (XRT).

Key support for IWM and XRT has proven crucial to the short-term performance of IWM and XRT. Bot sectors/ETFs bounced exactly from support.

Not all technical analysis proves correct with that much clinical precision, but XLV is at a point where key support has become visible.

The chart below shows that XLV may be carving out a short-term head-and shoulders pattern with a neckline around 46.70. This week this potential neckline coincides with trend line support.

A break below 46.70 would unlock a measured target of 45.15 +/-, which also coincides with trend line support.

As long as support holds, the up trend remains intact and we’re just talking about ‘unhatched eggs.’ Investors fishing for a price top may use broken support as a trigger level for short positions.

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The Stock Market Has Spoken – Even Government’s Biggest Bailout Success is a Failure

Fact and fiction are often separated by nothing more than a thin line. Some consider GM as a government bailout success story and the performance of the Consumer Discretionary Select Sector SPDR (XLY) seems to suggest that this claim is legit. What does the final authority – the stock market – say?

General Motors is once again number one in car sales worldwide. For this and other reasons GM is often heralded as the biggest success story of government bailouts. Is that really so?

According to a September 23, 2010 Wall Street Journal article, the U.S. must sell GM shares at $133.78 to fully recoup the $49.5 billion it spent to rescue the auto maker. The United States owns about one third of General Motors.

Shares of General Motors are currently trading at $22.50, 35% below its IPO price. GM saw a 41% profit decline in the last quarter. Production for the Chevy Volt, anointed to be the car maker’s financial savior a couple years ago, is being suspended due to poor sales.

One Step Forward and Two Steps Back

In an effort to make GM cars more attractive, GM is making it easier to own its product. How? With “attractive” loans, otherwise known as subprime loans.

According to an auto report published by Standard & Poor’s, the weighted average FICO scores for GM owners is only 579. 78% of all GM loans are for more than 5-years and the average loan-to-value on new cars is 110% (the average loan-to-value on used cars is 127%).

Haven’t we seen this movie before? Isn’t that what contributed to GM’s bankruptcy in 2009? Isn’t that what caused the real estate collapse in 2005?

Consumer Anomalies

The Consumer Discretionary Select Sector SPDR (XLY) is trading at an all-time high while consumer confidence shows little confidence.

It’s ironic that the consumer discretionary sector trades at all-time highs even though consumers didn’t get bailed out. The recipient of literally tons of bailout money on the other hand, the financial sector represented by the Financial Select Sector SPDR (XLF), trades 60% below its all-time high.

What’s the moral of the story?

1) The government’s definition of success is likely different from the common sense definition of success.

2) The government can give money to the financial sector. Financial conglomerates turn around and buy consumer discretionary stocks and even though American’s are hurting it looks like consumers are buying. It’s a win/win scenario for everyone but the consumer.
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Financials – Is the Most Despised U.S. Sector Getting Ready to Rally?

Investors are shunning the financial sector. Although financials account for more than 14% of the S&P 500 (SPY), investors (by one measure) have only 2% of their money invested in financials. Some contrarians take this as a buy signal, is it?

Knight Capital, MF Global, LIBOR fixing scandal, JP Morgan losses, excessive Wall Street bonuses … there seem to be unlimited reasons to dislike the financial sector (Financial Select Sector SPDR ETF – XLF).

When it comes to financials, investors are not only talking the talk, they are walking the walk. Right now financials are the most despised sector in the United States. Of the $900 million invested in Rydex sector funds, only $18 million are allocated to financials, that’s just 2%.

However, the financial sector accounts for 14.21% of the S&P 500 Index (SPY), which makes it the second biggest sector of the S&P (behind technology).

Extreme pessimism often results in unexpected price spikes. Is the financial sector getting ready to rally?

The Technical Take on Financials

Financials appear to be at an important short-term juncture, but let’s provide some long-term context before looking at the short-term.

From the 2009 low to the 2011 high, the financial sector (XLF) jumped from $5.88 to $17.20. Before that, XLF dropped from 38.15 to 5.88. Today XLF trades 61% below its all time high price tag of 38.15. In comparison, the Dow Jones Industrial Average (DJIA) is less than 8% away from its all-time high.

Important short-term resistance for XLF last week was at 14.85. This resistance was made up of the July 3 and 27 highs and a trend line that connects the March 27 and May 1 highs.

On August 8, XLF was able to close above 14.85. Such a break out is generally bullish. However, the volume on which XLF broke out was significantly lower than average (see chart below).

Based purely on the chart and sentiment, the bullish message deserves the benefit of the doubt as long as XLF remains above 14.80. But a break below 14.80 would severely ding the immediate up side potential for XLF.

What about the down side risk? Aggressive investors may decide to sell or go short XLF with a break below 14.80. The initial down side target would be around 14.45 – 14.50.