The broad market indices continue to press to new highs as most sentiment indicators show that investors are plowing money into the stock market as optimism grows. While new highs on the S&P 500 and the Dow Jones Industrial Average suggest that it may be hard to find a sector or exchange-traded fund (ETF) that still has room to run higher, our research shows differently.
While the financials and some technology groups have extended their rallies a bit too far, there are still many ETFs showing signs that they are ready to rally strongly through the year-end.
The following five ETFs are targeted by our trading models as those that are ready to close 2017 out with rallies that will outpace the broader market.
ETFs to Buy: PowerShares QQQ Trust ETF (QQQ)
The PowerShares QQQ Trust ETF (NASDAQ:QQQ) shares are a favorite for technology investors as the ETF tracks the performance of the 100 largest non-financial companies on the NASDAQ. The largest holdings are a who’s who of technology, including Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB) among other well-known companies.
Recent market activity has seen outflows from the large-cap technology stocks as investors migrated to the financial sectors. The migration has been the result of the expectations of higher interest rates and improvements in the economy. While the move from technology to financials was a smart money play, the trend is beginning to reverse.
We’re seeing signs that money is now shifting back to the technology sector as the financials have put in a less-than-impressive performance during earnings season. The beneficiary of the reversal appears to be the QQQ shares, as the names mentioned above are beginning to see some technical buying.
We expect the QQQ shares to cross the year-end finish line around $165 as it outperforms the S&P 500.
ETFs to Buy: iShares Select Dividend ETF (DVY)
The interest rate question continues to boggle Wall Street as well as Main Street. Will they raise, will they hold? The continued speculation and uncertainty has traders and investors interested in the dividend yielding stocks.
Now, the interest isn’t as strong as it was a few years ago, when interest rates were bottomed out, but the fact that the yield on the Ten Year Treasury continues to trade in a range has investors foraging for rates again.
The iShares Select Dividend ETF (NASDAQ:DVY) is reflecting that search, as the ETF just broke out of a trading range that had it bound below $93 since June, and the momentum is picking up speed.
The technical measures such as breadth and buying volume show that investors are engaging not only the ETF, but the big names held by it such as Lockheed Martin Corporation (NYSE:LMT), McDonald’s Corporation (NYSE:MCD) and Caterpillar Inc. (NYSE:CAT), as all of these names are breaking out to new highs. This positive breadth is helping to fuel a rally in the DVY shares.
As of now, our target for the year-end DVY price is $103.
ETFs to Buy: Materials Select Sector SPDR ETF (XLB)
Material stocks are being pushed higher by many things. First, demand for materials as the economy continues to show signs of expansion. Second, renewed interest in dividend yielding stocks (as mentioned with the DVY) and third, an improved technical landscape for the companies that make up the sector. The result is an outlook that has the Materials Select Sector SPDR ETF (NYSEARCA:XLB) shares outperforming the market through the end of the year.
While we saw most of the year present the XLB shares as a potential underperforming group in the market, this ETF has come alive since September as cash is flowing quickly into the companies that make up the sector. Part of the driving force behind this migration is the negative sentiment towards these companies.
A review of the analyst recommendations based on sectors shows that the Materials sector has been one of the least-recommended groups of stocks for some time as analysts have been unimpressed by their performance. Now, with demand on the rise and technicals improving, we’re seeing the potential for upgrades to these stocks as the earnings season provides positive results.
Our outlook for the Materials ETF (XLB) remains bullish as we target a year-end price of $66 for the shares.
ETFs to Buy: SPDR S&P Insurance ETF (KIE)
Everyone fell in love with the financials a few months ago as the struggling group of stocks suddenly woke up to the improving economy and speculation of higher interest rates. Given that, most of the financials took off on a parabolic rally that has resulted in a crowded trade, at least for most of the companies in the sector.
But if you lower the microscope a little to focus on a sub-sector in the financials, the insurance sector, represented by the SPDR S&P Insurance ETF (NYSEARCA:KIE) has the potential to outperform not only the banks and other financials, but the market in whole.
A few months ago, the insurance companies were rocked by the sudden increase in natural disasters. Traders and investors took the opportunity to sell these companies based on expectations that the payouts for coverage would result in severe reductions to their bottom line. As is usually the case, the market overreacted and the insurance companies are now playing catch-up.
KIE shares are just now getting back to their highs from early in the year as momentum and breadth in the sector is growing. In addition, sentiment towards the sector is beginning to shift from pessimistic to a more optimistic outlook. This means that we’ll see investors plow more money into the insurance companies as the year rolls to an end.
Expect to see a 10% rally in the insurance ETF as it heads towards a year-end target of $102.
ETFs to Buy: SPDR S&P Semiconductor ETF (XSD)
We mentioned the market’s migration back into the technology names earlier but there is a sector within the broad group that is likely to outperform into the year-end. According to our models, the semiconductor sector is set to continue its strength and finish the year on a strong note, and that bodes well for the SPDR S&P Semiconductor ETF (NYSEARCA:XSD).
One reason for the forecast is the move in some of the larger names that have been sleepers among the semiconductor stocks. One name that stands out is Intel Corporation (NASDAQ:INTC), a name that makes up the largest weighting of the XSD shares.
Intel shares broke out of their trading range in late September as the stock moved above $37. From there, traders and investors have been piling back into the company as the upside potential is rising. When you combine this with the success of other names in the group like Nvidia Corporation (NASDAQ:NVDA), the XSD shares are ready to lead the market higher through year-end.
Our current outlook put the XSD shares to finish the year on a strong note with a price target of $73-$75 as they break out of the top of their recent range with support at $67.
As of this writing, The Johnson Group did not hold any of the aforementioned securities.