Regular readers will know that I recently turned more positive short-term on US equities (see Ending in tears doesn't mean that the market goes down right away and Complacency? Don't worry, be happy!). Based on that assumption and my past research indicating that in a bull phase, traders should focus on high momentum stocks and sectors for their long positions (see Momentum + Bull market = Chocolate + Peanut butter), I offer the following sector and industry ETF suggestions for traders. These ETF suggestions are based on my sector and industry momentum screens and I would caution that some of the ETFs are correlated with each other, so it may not be appropriate to overly weight any two correlated sectors or industries.
Here is the relative performance chart of XLE to SPY. As the chart shows, Energy stocks have moved to a leadership position in the last few months. The sector got a little over-extended and has pulled back on a relative basis. Current levels may provide a good entry point for long positions.
One surprise that came out of my relative strength and leadership screen were Canadian stocks. As Canadian stocks are more heavily weighted in the resource sector and in energy in particular, EWC is somewhat correlated to XLE and therefore partly represents the energy overweight theme that I mentioned above. On the other hand, EWC is a more broadly diversified index with other sector exposures and it may represent a less risky way of taking an energy overweight position than a simple long position in XLE.
Recently I have questioned the lack of capital expenditures (see CapEx: Still waiting for Godot). Many capital goods producing companies have either lagged or only kept pace with the market, which made me question the strength and sustainability of the economic rebound. However, the cyclically and capital goods sensitive semiconductor industry has been a notable exception. While the group is a bit over-extended on a relative basis and could pull back at any time, semiconductors (SMH) represent a solid momentum pick for bullish traders.
The semiconductor stocks are a subset of the Technology sector and their performances are correlated, but Tech stocks recently staged a relative upside breakout in the context of a relative uptrend.
The poster child for risk appetite is back! Biotechology stocks (IBB) got clobbered in March and early April, but they have gradually recovered. This is an indication that the animal spirits of risk appetite is returning. If you are a bullish trader, IBB could be your vehicle.
In conclusion, it looks like the bulls are running again. Despite some obvious fundamental risks (see This will end in tears, but when?), my inner trader has turned to the Dark Side and he is running with the bulls. Some of the sectors and industry ETFs that I mentioned are prime candidates for long positions for bullishly inclined traders.
The usual caveats about risk applies here. Keep your stops tight if you enter positions.
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