Leading U.S. Sector ETFs Send Mixed Messages

Every bull market is built on the shoulders of strong leading sectors. Things tend to get dicey when the leading sectors start to lag. Here’s a look at three leading sector ETFs and some interesting developments.

Looking at leading or lagging sectors can provide clues about the overall health of a bull market.

This article will look at three leading sectors.

Retail Sector – SPDR S&P Retail ETF

The SPDR S&P Retail ETF (NYSEArca: XRT) soared 42.29% in 2013 and was heading for a strong finish (many thought). Retailers love the holidays (November/December), but the 2013 holiday period wasn’t kind to retailers.

As the XRT chart shows, retailers topped in the last week of November and are threatening to break below green support.

A breakdown around 83.50 and 80 for XRT would spell trouble.

Financial Sector – Financial Select Sector SPDR ETF

The financial sector has been leading the S&P 500 for much of 2013 and confirmed Wednesday’s new S&P 500 high (XLF closed 2013 with a 35.52% gain).

Unlike the S&P 500, the financial select sector SPDR (NYSEArca: XLF) is trading well below its all-time high. In fact, it is bumping against 50% Fibonacci retracement resistance at 22.01.

It will take sustained trade above 22.01 to unlock higher up side targets.

Small Cap Stocks – iShares Russell 2000 ETF

Small cap stocks tend to outperform large cap stocks in December/January, but the iShares Russell 2000 ETF (NYSEArca: IWM) has been on fire almost non-stop, up 38.69% in 2013.

Next notable resistance for IWM is around 119 (2002 Fibonacci projection).

Corresponding resistance for the Russell 2000 Index is at 1,166. Unlike IWM, the Russell 2000 Index is already trading above this resistance.

Summary

It’s said that a fractured market is a sick market. We are certainly seeing some ‘unhealthy’ divergences between the various leading sectors (this doesn’t even take into consideration the most recent Dow Theory divergence).

However, XLF and the Russell 2000 Index are at the verge of overcoming their resistance levels. A strong financial sector and small cap segment could also buoy the S&P 500.

The strong 2013 performance of all three leading sectors begs the question if there’s any ‘gas left’ for 2014. The following articles takes a look at how much up side is left:

Did the Strong 2013 Market Cannibalize 2014?

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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.

The ETF SPY provides FREE weekly trade set ups. >> Sign up for the free newsletter to get future ETF SPY ideas.

Weekly ETF SPY: XRT – Profitable Detail about Retail

The retail sector measured by the SPDR S&P Retail ETF trades less than 1% below its all-time high. But with recent market weakness, it may be beneficial to look at sectors that carry magnified down side risk, such as XRT.

The retail sector has been on fire, with the SPDR S&P Retail ETF (XRT) soaring 378% from its 2008 low to its 2013 high.

XRT is less than 1% below its all-time high and the recent weakness thus far looks like nothing more than a tempest in the teapot.

But what goes up must come down and after a 378% gain there’s a decent ‘coming down’ risk. Discussed below are some key support levels likely to trigger a deeper correction and support levels likely to halt the decline.

Wednesday’s drop registered a bullish percentR low-risk entry, which sent prices higher on Thursday. The percentR low-risk entry occurred against support (prior high/low) around 68.70 (see daily XRT chart).

This is now important short-term support. A daily close below 68.70 would trigger a sell signal for aggressive investors (with a stop-loss just above 68.70 (as long as prices remain above 68.70, there’s not much to get excited about).

Additional support is provided by the 50-day SMA at 68.34. After that comes a small ‘air pocket,’ an area without significant support. This is followed by a support cluster at 65.5 – 63.

In short, sustained trade below 68.70 should take XRT to 63 – 65.5. There’s more down side risk, but we’d have to evaluate the chart structure once we get there.

The weekly XRT chart shows prices cradled by a 4+ year parallel trend channel. The dashed center line of this trend channel has provide support numerous times and may do so again. If it doesn’t, watch out for lower prices.

Aside from the UltraShort Consumer Services ProShares (SCC), which provides 2x inverse exposure to the consumer discretionary sector, there is no short ETF that tracks XRT or the retail sector. However, investors may short XRT or buy/sell options.

AMaZiNg – 3,893 Tech Sector P/E Ratio Is Back

Quadruple digit P/E ratios – like 3,893 – were thought to be in the past. Courtesy of America’s premier online retailer we just got a flash from the past. Does that mean it’s time to party like it’s 1999?

Triple and quadruple digit P/E ratios of the late 1990s are fond memories for some and nightmares for others.

Regardless of your memories, the fifth largest component of the Nasdaq-100 just hit a P/E ratio of 3,893. Who is this ‘bubbleishous’ tech stock? Amazon.

Talking about nightmares, Amazon has become a nightmare to brick-and-mortar retailers. Amazon is spending tons of cash to make sure Amazon’s e-commerce site haunts brick-and-mortars day and night.

As the chart below shows, Amazon’s revenue (green columns) has grown steadily, but net income has taken a hit as profits are reinvested into new warehouses, called ‘shipment hubs.’

In 2012, Amazon added 20 shipment hubs, which decreased shipment costs from 4.5% of sales to 5.4% of sales (about $430 million).

Amazon’s gross margins widened from 20.7% to 24.1% and investors applauded the aggressive expansion, sending AMZN to an all-time high.

AMZN accounts for only 1.02% of the SDPR S&P Retail ETF (XRT), nevertheless, XRT is also trading at an all-time high.

Does this validate a P/E ratio of 3,500+ though? It’s a classic scenario of ‘mind over matter.’ As long as investors don’t mind, it doesn’t matter.