The time has come for traders to start locking in profits, as the market is acting like it has reached a tipping point. A scan of the market’s major sectors reveals a number of alpha-generating groups of stocks that are ripe for profit-taking, but a few exchange-traded funds and their respective components stand out as potential short opportunities for traders.
Starting off, Health Care SPDR (NYSE:XLV) shares just finished challenging another all-time high yesterday as they charged at $44 only to be rejected as the afternoon selling pressure mounted. Now, with traders looking to lock in profits, the XLV and a number of its component companies might come under additional pressure.
Looking at the breadth for the sector, the number of companies trading above their respective 50-day moving averages has started to decline. Two weeks ago, 79% of the XLV companies were above this critical support level. As of today, that percentage has dropped to 70%. The decline in the percent of companies above their 50-day tells us that strength in the XLV shares is disintegrating.
The chart below displays a historical view of the percent of companies above their 50-day moving average along with the historical price activity. Notable is the fact that four of the past five similar occurrences (a decline in the percentage after peaking above 80%) the XLV suffered significant declines.
In addition to taking profits from the XLV, if you’ve been holding this market leader, the following two ETFs appear ready to see some selling pressure from a reversal in their breadth:
SPDR Dow Jones Industrial Average
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) — or the “Diamonds” — is a proxy for the Dow Jones Industrial Average, used often to invest in the “market” via the simple purchase of one share.
Two weeks ago, 93% of the companies in the Dow were above their respective 50-day trendline; on Tuesday, that percentage dropped to 83%, signaling a shift in the market’s momentum. The shift in trend suggests that it’s time to take profits from the DIA shares.
Consumer Discretionary SPDR
Consumer Discretionary SPDR (NYSE:XLY) shares have outpaced the market’s gains for the past year, but the new tax laws and upcoming sequestration are likely to get the discretionary spenders thinking twice about taking money out of their pockets.
A tectonic shift in the breath of the ETF that represents these companies is signaling that the XLY shares might be a better short position than long over the next two to four weeks. We’re targeting a retracement back to the $44 level during the upcoming pullback.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.