The market outlooks for 2016 are rolling in, and things aren’t looking too rosy for the markets.
The continued quagmire surrounding interest rates, global demand for crude oil and its implications for the global economies has the average analyst calling for slightly lower-than-average returns with the average year-end 2016 S&P 500.
This in mind, investors should already be posturing for what is likely to be a market that’s difficult to navigate over the next year, as stocks are likely to continue their random sideways movement.
However, there are a few ways to position a portfolio for success in a trendless market, whether through stock picking or targeted sector investing.
Our approach focuses on a healthy combination of both, but today we’re looking at the best sectors for targeted growth in the first quarter of 2016.
“Happy New Year” ETFs to Buy: SPDR S&P Pharmaceuticals ETF (XPH)
Pharmaceutical companies like Eli Lilly (LLY) and Merck & Co (MRK) have spent much of the second half of this year trading sideways as investors are trying to get a handle on how future regulatory changes could affect their bottom line. At the sector level, though, the SPDR S&P Pharmaceuticals ETF (XPH) is showing signs of strength that can’t be found in other areas.
Breadth among the companies that comprise the XPH shares remains strong. According to our proprietary ETF Breadth Index, the XPH shares are the third strongest of the widely traded exchange-traded funds, with 12% of the ETF components currently trading at new 12-month highs.
Sentiment toward the Pharmaceutical ETF is relatively mixed, suggesting that the sector is not likely to be crowded with bullish investors. This is important, as “crowded trades” often signal that the market, sector or a stock are near the end of a bullish trend.
The charts suggest continued strength in the XPH as it remains one of the few widely traded ETFs to be trading in technically bullish trends. The XPH ETF recently broke above its 50-day trendline, moving it into a technical bull market trend.
Further analysis on the Pharmaceutical ETF’s price activity is targeting a move toward the $60 range during the first half of 2016, a 20% gain from today’s prices.
“Happy New Year” ETFs to Buy: SPDR S&P Semiconductor ETF (XSD)
For the most part, semiconductor companies have been flying well below most investor’s radars, posing a stealth rally of sorts.
The SPDR S&P Semiconductor ETF (XSD) is posting gains just under 10% as we head into the last week of trading, putting it in the No. 2 slot of our widely traded ETF list. The strength is attributable to fundamental strength among the component companies and healthy merger and acquisition activity within the sector.
Investor sentiment toward the Semiconductor ETF component companies is decidedly bearish for a group that has performed so well through the current year. Currently, the average Wall Street analyst recommendation for the semiconductor stocks stands at 55%.
A relatively low buy recommendation level suggests that we will likely see analysts begin to upgrade the companies within the Semiconductor ETF as the New Year begins, helping to drive values higher.
The SPDR S&P Semiconductor ETF chart is equally bullish as we head into the New Year.
The XSD recently completed a bullish golden cross pattern, as its 50-day trendline moved above its 200-day. The last occurrence of this pattern was almost exactly a year ago on Dec. 14, 2014, ahead of an 18% rally over the following six months.
Our current price target for the SPDR S&P Semiconductor ETF is $48 per share by the end of the first quarter, a 10% gain from current prices. We expect the same bullish tailwinds to keep the XSD shares ahead of the market for all of 2016.
“Happy New Year” ETFs to Buy: SPDR Consumer Staples Fund ETF (XLP)
The SPDR Consumer Staples Fund ETF (XLP) isn’t sexy, but they will work hard for your portfolio in 2016. The consumer staples companies have long been viewed as a defensive sector under the theory that we’ll all keep eating, drinking and smoking (among other things) when the economy slows.
Hey, it’s worked for decades, and that’s why we’re sticking with it now.
Outside of theories, the SPDR Consumer Staples Select Sector Fund ETF has turned in a respectable 3.1% year-to-date return and remains one of the stronger positioned ETFs headed into 2016. Our ETF Breadth Index ranks the XLP shares as the strongest among widely traded ETFs, with 24% of its component companies making new one-year highs.
Another sign of the XLP ETF’s strength is the fact that 75% of its component companies are trading above their respective 50-day moving averages. This is the highest reading of this indicator among our ETF universe and is a sign of continued strength.
Sentiment, however, is amazingly neutral on this group, as the average “buy” recommendation for a stock within the XLP currently stands at 41%.
We love this, as it means that Wall Street is on the wrong side of a large number of companies within the SPDR Consumer Staples Select Sector Fund ETF, suggesting that analyst upgrades should be coming on these companies.
The XLP chart shows slow and steady strength. The ETF maintains a strong bullish trend that currently targets a move to our $54 price target during the first quarter, an 8% gain for the quarter for those holding the ETF.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.