There continues to be technical signs that money is flowing out of some of the classic defensive sector ETFs like the Consumer Staples Select SPDR Fund (XLP) and the iShares Dow Jones Telecom Index (IYZ) and into more economically sensitive areas as in the Financial/Industrials Select Sector SPDR Funds (XLF/XLI).
Other deep cyclical Select Sector SPDR Funds like Energy (XLE) and Materials (XLB) are a bit trickier. For example, although XLE appears to be on the verge of a technical breakout on the price chart, it still trades below its Feb 2013 relative strength downtrend line.
XLB has also shown price improvements, but relative to the S&P 500 it remains below its Mar 2013 breakdown level. Despite the relative strength work to be done, these charts are still technically in good shape. This is a prevailing theme amongst many sector ETFs: despite the zero sum game that needs to be played by portfolio managers to achieve alpha, the price charts are holding up very well.
It is this bottom up approach that supports a continuation of this cyclical bull market.
Technology Select Sector SPDR Fund (XLK) – Apr 2013 was an important month for XLK as it negated a large head and shoulders top pattern, developed a bullish positive outside month, and ended its Sep 2012 relative strength underperformance cycle. XLK is now testing its 38.2% Fibonacci retracement of the 2000-2002 bar market (32.04). A breakout opens the door for a test of the top of the 2009 uptrend channel (36) and the 50% retracement (38.42).
Financial Select Sector SPDR Fund (XLF) – From a relative strength perspective the Jan 2013 head and shoulders top pattern has been negated as XLF has now surged above its Mar 2013 high. This move is the primary driver of the allocation shift. The absolute chart however still may be painting a different story as a potential head and shoulders top may be forming. The top of the 2011 uptrend channel and psychological supply resides near 20.
Health Care Select Sector SPDR Fund (XLV) – At this point the key will be to manage risk/expectations appropriately. To the upside, psychological supply and the technical target based on the breakout of the 2011 uptrend channel reside near 50. To the downside, traders move up support to the Apr 2013 high (48.38), but more formidable support corresponds to the 4/8/13 pivot low, the May 2013 lows, and the 50-day moving average near 46-47.
Consumer Discretionary Select Sector SPDR Fund (XLY) – XLY looks to be pushing through the top of its 2009 uptrend channel near 57. However, an overbought condition exists and some kind of negative outside day pattern formed on 5/16/13. This suggests that a pullback may be necessary to alleviate this condition, which may be an opportunity for traders, but it does not translate to a tactical shift yet. Pullbacks will remain buying opportunities.
Consumer Staples Select Sector SPDR Fund (XLP) – From a relative strength perspective, a large symmetrical triangle pattern has been developing over the last 2 years or so. The outcome of this pattern could play a pivotal role for XLP. Near-term however, last week’s technical breakdown warrants an underweight allocation. From an absolute perspective, the Mar 2013 breakout of the 2009 uptrend channel targets a move into the mid-40s.
Next page: More sector ETF technical analysis
Energy Select Sector SPDR Fund (XLE) – Although XLE looks to be pushing through a key level of resistance, it is the failure to clear the Feb 2013 relative strength downtrend that allows for an under allocation. With that said, in order to protect profits, initial support rises to 78.25-78.50 or the bottom of the 5/3/13 upside gap and the 50-day moving average. To the upside, a convincing breakout could ignite a rally towards psychological supply at 90.
Industrial Select Sector SPDR Fund (XLI) – Of the deep cyclical Select SPDR Funds, XLI appears to have the strongest technical attributes. In fact, the relative strength technical breakout at the end of last week warrants a slightly more aggressive outlook. With that said, an overbought condition exists and XLI is approaching a 2 –month head and shoulders target. The prior neckline and the 50-day moving average near 42 remains initial support.
Utilities Select Sector SPDR Fund (XLU) – The Jan-Apr 2013 rally of 21% resulted in an extreme overbought condition as this ETF began to pull back. It is interesting how the relative strength chart began to turn down about a week earlier. The underperformance has been sharp, but there is no evidence yet of a sustainable turnaround yet. Next support isn’t until 38-38.50, which, among other things is the 38.2% Fibonacci retracement of the Jan.-Apr. 2013 rally.
Materials Select Sector SPDR Fund (XLB) – XLB still needs to clear its Mar 2013 breakdown level on the relative strength chart to signal that the technical damage is being repaired. There is also resistance at 41.28 or the Apr 2013 high to contend with. Failure to clear this resistance could set into motion the formation of the head of a head and shoulders top pattern. Neckline support would be near the Feb./Apr. 2013 lows closer to 37-37.35.
iShares Dow Jones US Telecom Index (IYZ) – A potential head and shoulders top on the relative strength chart, an overbought condition, and the proximity to its Jun 2008 high (27.50) is the basis for the allocation shift. Initial support corresponds to the technical breakout level near 26-26.25. Failure to maintain this level opens the door for a move towards the 4/17/13 low (25.35) and the 50-day moving average (25.25).
J. Beck Investments is an independent provider of technical research for ETFs.