Despite the antics in Washington, the S&P 500 appears to be trying to muster up the strength for a year-end rally to close out 2012 at or near fresh 52-week highs. But while the market is scratching a rally together, a growing number of ETFs already are seeing more and more of their holdings strike new highs, themselves.
These are the ETFs and sectors that investors should favor as the year-end rally builds steam.
On a daily basis, we track the number of companies in all of the listed ETFs to gauge the percent of constituent companies that are making new highs. The theory is simple: The larger the number of companies in an ETF making new highs, the stronger the performance. This especially stands true when the ETF itself is a market leader.
They say investing in momentum can be key … well, this is an easy way to find the ETFs with the most upside momentum.
As of this week, three ETFs are showing building signs of a breakout. What makes this even better is the fact that Wall Street isn’t saying much about these sectors’ performance, meaning the trades aren’t “crowded” yet — a good sign, as it suggests they’re still in the early stages of a rally.
The table below identifies the widely traded ETFs along with their respective new-high/new-low data in order of bullishness from top to bottom. Simply put, the higher the ratio of new highs to new lows, the more bullish the potential is for that sector to continue on the momentum trade. The S&P 500 Index ETF (NYSE:SPY) is included to provide a benchmark measure.
Topping the list is the Insurance sector representative, SPDR KBW Insurance ETF (NYSE:KIE). This ETF is headlined by names like The Travelers Companies (NYSE:TRV), Allstate (NYSE:ALL) and one of our favorites for the last year, Cincinnati Financial (NASDAQ:CINF).
Insurance has been one of the great leaders in 2012 as investors appeared to have replaced the traditional financials with this derivative of the group. The KIE is almost 20% higher for the year, beating the S&P 500′s return of 13%.
Momentum is strong here as 15% of the KIE share’s component companies are breaking to new 12-month highs and none are breaking to new lows for the same period.
Looking at the list of companies making new highs, we love the aforementioned Cincinnati Financial, a Dependable Dividend Stock that boasts a yield of 4%.
Additionally, Travelers is gaining the attention of investors as it climbs back toward $75. A break above this level likely will set the technical traders into “buy mode” on this under-loved stock.
No. 2 on the new-high list is the Consumers Staples Select Sector SPDR (NYSE:XLP). Companies like Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and J.M. Smucker (NYSE:SJM) work in a market environment because we’re all still going to purchase the products that they offer, regardless of fiscal cliffs or slowing economies.
The XLP actually is trailing the S&P 500 year-to-date, but recent price activity suggests that this ETF might take a leadership role in the first-half of 2013.
Seven of the 42 companies in the XLP are making new 12-month highs. For our money, Costco (NASDAQ:COST) is an attractive name as the bulk retailer has surged higher on solid retail results. The recent special dividend shaved $7 from the stock price, likely setting shares up for a nice short-term trade as we see the shares headed back to the pre-dividend prices above $106.
Another unsung performer in the XLP is Dr Pepper Snapple (NYSE:DPS). This stock is leading the market higher, despite the fact the analyst community has it ranked among the worst consumer staples companies. We expect to see this undervalued leader shoot higher as it garners the attention of the Street, drawing more buyers into the mix.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.