How Are The Relative Strengths of Sectors Shaping Up?

The S&P 500 has been in a continuous uptrend since 2009. In between, it retraced few times including a -21.6% decline in 2011. During this time, many of its sectors outperformed it over extended periods of time. By rotating into these sectors when they were outperforming the index would have been a good strategy. With that in mind let’s see how the sectors of S&P 500 – represented by SPDR ETFs – are doing?

We will use the nine Select Sector SPDR ETFs and the SPDR S&P 500 ETF for our analysis. The relative strength of a sector ETF is depicted by its ratio with S&P 500 ETF. For readability and better chart plotting, we have multiplied the ratio with 100. For example the relative strength of XLY is calculated as ( XLY / SPY ) * 100.

XLY/SPY Ratio - Weekly - 02-11-2015XLY – Consumer Discretionary

The trajectory of consumer discretionary sector, XLY, has been similar to that of S&P 500 since 2009. The trend of its relative strength chart is also similar as shown by the weekly chart of XLY/SPY

Beginning of January 2014, XLY started to underperform SPY. But, since early November 2014, it has been outperforming the broader index.

XLY - Daily - 02-11-2015On daily timeframe, XLY is breaking above a horizontal channel that it had been forming since November 2014. The lower limit is formed by the lows made in mid-December and mid-January. The upper limit was made by the high of late-December.

The price action on Tuesday February 10, 2015 took the ETF above the horizontal channel to the all time high. The upper limit of the channel is around 73.00 and the lower limit around 68.50, giving it a height of 14.50 point. The measured 1-to-1 target for XLY is near 87.50.

In mid-October, XLY had made low of 61.68 near the two other lows – in February 2014 and April 2014 – that it had made earlier in 2014. It then climbed up to 72.97 by December 31. The 1.618 Fibonacci extension of that move from the subsequent low of 68.50 made on January 16, takes us to 86.76, which is near the measured target range of the horizontal channel.

Within XLY, the top four companies that are doing better than the ETF are Walt Disney (DIS), Home Depot (HD), Lowe’s Cos. Inc. (LOW) and Target Corp (TGT). (click on charts to expand)

DIS / XLY Ratio - 02-11-2015HD / XLY Ratio - 02-11-2015LOW / XLY Ratio - 02-11-2015TGT / XLY Rateio 02-11-2015

XLP / SPY Ratio - Weekly - 02-11-2015
XLP – Consumer Staples

XLP, the Select Sector Consumer Staples ETF, is also on a uptrend since 2009 but unlike XLY, it has not out performed the SPY consistently.

From April 2013 to July 2014, SPY outperformed XLP. The ration broke above the downtrend line in September 2014 and XLP started to outperform SPY. After making a high in mid-January, the ratio declined – meaning XLP was lagging and is touching the uptrend line. If ratio bounces off the uptrend line then XLP will again start to outperform SPY.

XLP - 02-11-2015On daily timeframe, XLP is in a short-term trading range within an up-ward sloping channel. However, on a longer time frame it is still in a uptrend.

Some of the stocks within XLP that are outperforming the ETF are Reynolds American Inc. (RAI), Costco Wholesale Corp. (COST), CBS Health Corporation (CVS), and Walgreens Boots Alliance Inc. (WBA).

WBA / XLP Ratio 02-12-2015 CVS / XLP Ratio 02-12-2015 COST / XLP Ratio 02-12-2015 RAI / XLP Ratio 02-12-2015

XLF / SPY Ratio - Weekly - 02-11-2015XLF – Financials

For a long time after the 2008 financial crisis, the financial sector ETF, XLF, was underperforming the broader market ETF, SPY. This changed in November 2011 when the XLF started to outperform SPY. The trend continued up to July 2013.

Then for next 13-months, SPY did better than XLF. From mid-August 2014 to mid-December 2014, XLF again took the leadership position. However, since then it has not been doing better than SPY.

XLF - 02-11-2015XLF is still in a uptrend on a longer time frame, albeit, the rate of change is smaller. It has retraced sharply from the highs made in late-December. Between mid-January and early-February, it made double-bottom.

Some of the holdings of XLF that are outperforming the ETF are: Travelers Company (TRV), BlackRock Inc. (BLK), and Simon Property Group (SPG).

XLE / SPY - Weekly - 20-11-2015
XLE – Energy

The energy sector has been in severe decline since the summer of 2014 but the ETF, XLE, had been underperforming SPY for longer than that.

XLI / SPY Ratio - Weekly - 02-11-2015
XLI – Industrials

The industrials have been on a uptrend too. XLI has done better than XLE. It also outperformed SPY from September 2012 to June 2014. Later in 2014, it tried to outperform SPY but that did not lost and since November 2014, it is underperforming the benchmark ETF.

XLB / SPY Ratio - Weekly - 02-11-2015
XLB – Materials

Like energy, materials sector is also lagging SPY. Like XLE it is also in a short-term range, though its range is at the upper end of it uptrend since 2009. XLE has retraced significantly from the high made in June 2014 and its short-term range is at the bottom of that decline. Nevertheless, XLB is also underperforming SPY since September 2014.

XLV / SPY Ratio - Weekly - 02-11-2015
XLV – Health Care

The Health Care sector is in a strong uptrend for a long time. It has also outperformed the SPY since early 2011 with short periods of underperformance. Since mid-January, XLV has been underperforming SPY but the ratio is still above 26-week simple moving average, which has acted as a strong support since April 2012.

Some of the components of XLV that are outperforming the ETF are UnitedHealth Group, Inc. (UNH), Celgene Corp (CELG), Actavis plc. (ACT), Allergan Inc. (AGN), and Anthem Inc. (ANTM) (click on charts to expand).

ANTM / XLV Ratio - 02-12-2015 AGN / XLV Ratio - 02-12-2015 ACT / XLV Ratio - 02-12-2015 CELG / XLV Ratio - 02-12-2015
UNH / XLV Ratio - 02-12-2015

XLU – Utilities

XLU / SPY Ratio - Weekly - 02-11-2015
Like most sectors of S&P 500, utilities sector is also on a prolonged uptrend after bottoming in 2009. During this time it had some steep declines – late-2009, July-to-November 2012, April-to-June 2013 and since late-January 2015.

However, XLU did not always outperform SPY. From late-2008 to early-2011, it mostly underperformed SPY. From February 2011 to September 2011, it outperformed the broader ETF. In mid-December 2014, the ratio, XLU/SPY, broke above a down trend line extending from late-2008. But, the bounce reversed by late-January 2015 and the ratio is again back to the downtrend line putting some question mark over utilities performance in comparison to SPY.

XLK / SPY Ratio Weekly - 02-11-2015XLK – Technology

The technology sector, XLK, has almost tripled since bottoming in 2009. It trend has been consistent on longer timeframe but its performance compared to SPY has not. It had periods of strong outperformance followed by similar performance and then underperformance.

Since July 2013, ratio of XLK with SPY has been on a uptrend. This means that XLK is outperforming the broader ETF.

Some of the components of XLK that are outperforming it and helping outperform SPY are: Apple Inc. (AAPL), Visa Inc. (V), Texas Instruments Inc. (TXN), Hewlett-Packard Co. (HPQ), Automatic Data Processing (ADP).

HPQ / XLK Ratio - 02-12-2015 TXN / XLK Ratio - 02-12-2015 ADP / XLK Ratio - 02-12-2015 V / XLK Ratio - 02-12-2015 AAPL / XLK Ratio - 02-12-2015

Bottom Line

The bottom line is that when the market is going up then it behooves to be in the sectors that outperforming the broader index. That way you increase your returns compared to the benchmark. It works same way when the markets decline, you just loose less.

S&P 500 Sector WeightingsThe current market dynamics tell us that some of the sector ETFs are outperforming the SPY, some are underperforming it and others are just matching it. A good strategy is to be over-weight the outperforming sectors, under-weight the underperforming sectors and equal weight other sectors. The base – equal weight – is based upon the corresponding sector weightings within S&P 500.

Here is what the relative strengths of sectors telling us.

  • Over weight Sectors:
    • XLY – Consumer Discretionary
    • XLV – Health Care
    • XLK – Technology
  • Under weight sectors:
    • XLE – Energy
    • XLU – Utilities
  • Equal Weight Sectors:
    • XLP – Consumer
    • XLF – Financial
    • XLI – Industrials
    • XLB – Materials

Mind you the relative strengths continues to change. We are using weekly timeframe to avoid whiplashes and volatility. Weekly signals change slowly and have more lag compared to signals based upon shorter timeframe hence using them will make you enter or exit a trade later than the change in direction.


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