Click to Enlarge The market looks to be suffering its much-awaited “correction,” as stocks have posted two losing weeks in a row, with the broader indices roughly 3.5% from their early-August highs.
And now, some exchange-traded funds and stocks are starting to get attractive for dip-buyers.
The idea of buying the dips is frightening for most investors because it’s counterintuitive to buy when everyone else is selling. But putting the discomfort aside, the art of “buying strength on weakness” is how the big money makes its living.
The first step in this game plan is identifying strength. Our proprietary ETF database does this by filtering the ETF universe for two identifying qualities: relative strength against the market, and a high ratio of new highs to new lows for an outperforming ETF. The first tells us the ETF is performing strongly, while the high/low ratio tells us whether that strength is robust, or just the result of a couple strong companies dragging the group higher.
A scan of the current relative strength data shows that the leadership in the ETF circles has been focused on the regional and larger banks, gold miners, Internet, biotech and restaurant funds, with each of these ETFs besting the market’s returns by more than 5% for the past three months.
Strength among a few of these ETFs have been fueled by more robust positive breadth than others, making them a more attractive targets for buy-the-dip action. The following three are our current favorites:
SPDR S&P Regional Banking ETF
The move comes with improving breadth as 10% of the companies in the KRE are hitting new 12-month highs while zero are making new lows. For comparison, the same ratio is negative for the S&P 500, indicating current weakness in the market.
Technically, the KRE is bouncing from its 50-day moving average, which begs the technical traders to open new positions on the recent weakness. From a sentiment perspective, KRE’s companies are among the most heavily shorted as a group, indicating potential for short covering help the KRE move higher.
We expect the interest-rate trends and political environment to affect the regional banks less than the larger financials, and we expect a move to $40 for KRE within the next three months.
Health Care SPDR
Click to Enlarge Healthcare stocks continue to benefit from the changing environment and currently offer a technical buy similar to the regional banks.
The Health Care SPDR (XLV) has returned more than 25% this year compared to the S&P 500. The strength shines through in the current new high/low ratio, which shows 13% of the component companies positing new 12-month highs vs. only 2% posting new lows.
XLV units are currently bouncing off of their 50-day moving average, drawing a nice entry point for a new position, as our research suggests that shares should hit a target of $53 during the next three months.
SPDR S&P Biotech ETF
Click to Enlarge Biotechnology stocks are hot for an old-fashioned reason: The companies are innovating, and product pipelines for the biotech sector are bulging.
Returning more than 30% for the year, the SPDR S&P Biotech ETF (XBI) is leaving the market behind and probably won’t look back.
According to our short-interest research, the XBI companies represent the most heavily shorted circle of stocks, meaning a short-covering rally is still lurking to pop prices higher.
Following the common theme, XBI units are hovering just above the 50-day moving average — a trendline that will likely act as support. A bounce from the 50-day will get the shorts running and send XBI back toward its all-time highs.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.