After the volatile shock and recovery the U.S. stock market has endured this month, many investors are wondering where they should be putting their money. Could any sectors possibly have any sizzle left?
To best identify those sectors that still have some sizzle left, the best way to start is to look for those sectors that had some sizzle to begin with. After all, with the exception of an increased concern that inflation is starting to pick up and Treasury yields are going to be moving higher in the near future, most of the fundamentals that were driving the market at the beginning of 2018 are still driving the market today.
It’s just that now everyone is a little more on edge after living through the volatility of the past two weeks.
Scanning the Sectors
Looking at a relative strength chart of the various sectors of the S&P 500 in Fig. 1, you can see that the consumer discretionary sector (represented by the Consumer Discretionary SPDR (ETF) (NYSEARCA:XLY)), the technology sector (represented by the Technology Select Sector SPDR Fund (NYSEARCA:XLK)) and the financial sector (represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF)) are the top-performing sectors in 2018.
Fig. 1 — Sector Relative Strength Chart (Select Sector SPDR ETFs)
They suffered pullbacks in early February just like every other sector, but they each started from a more profitable level in late January and have all recovered well.
Typically, when a sector is doing well, it continues doing well until something shifts in the market. For example, the energy sector (represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE)) was doing well earlier this year until the price of crude oil dropped from its recent highs, and the utilities sector (represented by the Utilities SPDR (ETF) (NYSEARCA:XLU)) was doing well until Treasury yields started shooting higher.
The fundamentals that have been driving XLY, XLK and XLF higher — namely strong consumer confidence and increased earnings in the wake of the tax cuts that were passed last year — haven’t changed in the past few weeks. In fact, much of the impact of the tax cuts hasn’t truly been felt in the broader economy, making it increasingly likely that these sectors will continue to show strong relative strength.
The Bottom Line
The market is still trying to shake off the uncertainty that thrust itself onto Wall Street two weeks ago, but it has been resilient in the past and is just as likely to be resilient once again. Watch for those stocks and sectors that have been darlings on Wall Street up to this point to remain so in the near term.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
