Earnings season is upon us and, as always, traders everywhere are wondering what the best sectors will be this season.
While it’s impossible to know for sure which sector will be the top performer this earnings season — especially if your crystal ball is on the fritz — there is one analytical methodology that can put the odds in your favor of determining which sectors will be the strongest and which sectors will be the weakest: relative strength analysis.
When conducting a relative strength analysis, analysts compare the strength of each stock market sector against every other sector by determining the percentage growth/contraction each sector has experienced since a specific start date in the past. They then apply Newton’s first law of motion — an object in motion tends to stay in motion — and assume that, barring any unforeseen events or information, the sectors that have been performing well will continue to perform well and the sectors that have been performing poorly will continue to perform poorly.
Fig. 1 — SPDR Sector ETFs Comparison Chart, 2018 Year-to-Date
For example, by looking at a comparison chart of the 10 S&P 500 sectors tracked by SPDR since the beginning of 2018, like you can see in Fig. 1, you will see the following results:
- Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY): 11.65%
- Technology Select Sector SPDR Fund (NYSEARCA:XLK): 10.86%
- Energy Select Sector SPDR Fund (NYSEARCA:XLE): 5.34%
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV): 4.02%
- Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE): 1.16%
- Utilities Select Sector SPDR Fund (NYSEARCA:XLU): -0.33%
- Financial Select Sector SPDR Fund (NYSEARCA:XLF): -2.65%
- Materials Select Sector SPDR Fund (NYSEARCA:XLB): -3.13%
- Industrial Select Sector SPDR Fund (NYSEARCA:XLI): -3.14%
- Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP): -6.90%
The Consumer Discretionary and Technology sectors have been the clear winners in 2018, gaining more than twice as much (11.65% and 10.86%, respectively) as the next closest sector — Energy (5.34%).
On the flip side, the Consumer Staples sector has been the clear loser, losing more than twice as much (-6.90%) as the nearest sectors — Materials and Industrials (-3.13% and -3.14%, respectively).
Fig. 2 — SPDR Sector ETFs Comparison Chart, Since Q2 2018
Interestingly, if you zoom in and look at a shorter time frame and compare the performance of the different sectors since the beginning of the second quarter of 2018, you get similar results, as you can see in Fig. 2:
- Energy Select Sector SPDR Fund: 17.12%
- Consumer Discretionary Select Sector SPDR Fund: 13.64%
- Technology Select Sector SPDR Fund: 12.39%
- Health Care Select Sector SPDR Fund: 9.33%
- Real Estate Select Sector SPDR Fund: 7.92%
- Materials Select Sector SPDR Fund: 6.77%
- Utilities Select Sector SPDR Fund: 3.75%
- Consumer Staples Select Sector SPDR Fund: 2.53%
- Industrial Select Sector SPDR Fund: 1.33%
- Financial Select Sector SPDR Fund: 0.82%
The percentage gains for each sector are higher during this shorter time frame because the chart is showing sector performance in the aftermath of the major pullback in early February of 2018, while the performance shown in Fig. 1 included the pullback, but the relative strength ranking for each sector was largely unchanged during this period, with the following exceptions:
- Energy moved from 3rd place to 1st
- Materials moved from 8th place to 6th
- Consumer Staples moved from 10th place to 8th
- Financials moved from 7th place to 10th
Bottom Line on the Best Sectors in 2018
While there will certainly be a few earnings surprises this quarter, as there are every quarter, our relative strength analysis tells us that Energy, Consumer Discretionary and Technology stocks have been performing well so far in 2018 — whether we’re looking at their year-to-date performance or their performance since the beginning of the second quarter — and that they are likely going to continue to do well.
On the other hand, Consumer Staples, Industrial and Financial stocks have been performing poorly and are likely to continue doing so.
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.
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