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4 Sectors Not to Get Caught in During the Next Correction

These are the most overbought sectors as defined by the steep slopes of their charts


Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.

Despite weaker-than-expected economic data, stocks managed to push higher last week, with the S&P 500 hitting a new all-time high. While the uptrend remains intact, as I have pointed out throughout the past week in this column, traders and investors would be wise to exercise caution with the onslaught of corporate earnings releases during the coming weeks.

As of Friday, the SPDR S&P 500 (NYSE:SPY) was higher by 11.51% year to date, 15.8% in the past 12 months, and 2.35% in the last week alone. The question I must reiterate this morning is whether this steep run into the first-quarter earnings season has enough momentum to keep going at this rate.

While the trend higher remains intact despite weakening internals and signs of slowing global growth, bulls likely won’t wait for too many companies to disappoint on their earnings outlook before taking profits from the great run higher.

SPX Chart
Click to Enlarge

A quick look at the S&P 500 reveals little damage with the possible exception being a doji candlestick on Friday, and negative divergence between price and the stochastics momentum oscillator.

Last week’s stock performance was led by health care, consumer goods, services and financials, while utilities and basic materials lagged. As such, last week’s picture was mixed.

If we look out over the past month, however, the outperformance of defensive sectors versus cyclical sectors is noticeable. The defensive posturing of investors was also seen on Friday, despite an intraday recovery.

In short, earnings season should make things at least somewhat more interesting as investors get a read on corporate performance and guidance, and are able to consider that in the face of weakening global economic data.

With that in mind, I took a look at the S&P 500 sector ETFs and scanned for the steepest slopes. Why? Because if and when we were to get a correction, I will want to consider shorting — or at least not being caught overweight — the most overextended sectors.

SPX Sectors Chart
Click to Enlarge

The chart above highlights the four most overbought sectors as defined by their steep slopes. The sectors are: consumer discretionary, utilities, consumer staples and health care.

With Friday’s sell-off in gold I would be remiss not to discuss the commodities universe. On April 10, I said any near-term bounce in gold is likely fail and lead to lower prices, playing into my longer-term bearish outlook for gold. The near-term bounce to the long side trigger point that I discussed — a close above $154.50 in the SPDR Gold Shares (NYSE:GLD) — did not materialize, as gold significantly broke below a multi-year support level. 

DJP Chart
Click to Enlarge

Looking at the iPath DJ-UBS Commodity Index Total Return ETN (NYSE:DJP), commodities are in a continued downtrend. This ongoing trend is deflationary, and thus, makes me question whether the divergence between stocks and commodities can continue for much longer without at least somewhat of a mean-reversion move.

Stay tuned as this week is sure to bring about some surprise moves in stocks that likely will also dictate the direction of the broader stock market for the coming weeks.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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