Many retail investors focus on the major stock indices such as the Dow Jones and the S&P500. The Dow Jones is a rather narrow snapshot of financial markets with only 30 stocks whereas the S&P500 is much broader. So far the Dow and S&P500 are up around 5% YTD hardly much to get excited about and the Tech heavy NASDAQ100 is down a little but let’s take a look under the hood at individual sectors. Thanks to Exchange Traded Funds (ETFs) it is possible to take a view on a specific sector rather than the whole market. You can also short sector ETFs and profit from weak sectors or trade options on them.
There are 11 main Sector ETFs that can be found at: http://www.sectorspdr.com/sectorspdr/ each sector has a weighting in the S&P500 they are not all equal, as I write the biggest two sector are Technology (XLK) 22% and Healthcare (XLV) with 15%. The smallest sectors are Materials (XLB) 2.8% and Real Estate (XLRE) with 3.25%.
Here is a screen grab of the sectors. source: sectorspdr.com
As stated the S&P500 is up around 5% Year To Date however the individual sectors have had much bigger moves and variations – the biggest gainer so far are Utilities (XLU) which is up 21% and Energy (XLE) up 12% with Consumer Staples following closely at 10%. The lagging sectors so far are Financials (XLF) down 4% and Financial Services (XLFS) down over 7%.
So what are sectors telling me?
So far this year it’s been defensive sectors that have done better than higher growth areas. Utilities such as electric and telephone companies are normally bought for the dividend yield and predictable earnings. Consumer Staples (XLP) have also attracted funds with big dependable food and tobacco stocks attracting scared money. Also in a near zero interest rate environment getting a decent dividend yield of 3% a year is attractive.
The sector which I believe offers a very good potential and has been left behind this is year is Healthcare (XLV) which is up 2% and I believe we will be at a new all-time high in this sector by year end and I can see this ETF trading at $80+ which is 10% higher than we are now. The big stocks in this sector are Johnson & Johnson (JNJ) 12% Pfizer Inc. (PFE) 7.81% Merck 5.85% and UnitedHealth Group 4.86%
This sector offers dependability of healthcare spending and growth. The sector stands to benefit from the aging population and higher spending on pharmaceuticals and healthcare. All those hip operations are great news for JNJ! The ETF also gives a near 2% a year in dividend yield.
The second sector I would look at to play catch up for the rest of the year is Technology (XLK) which is up 3% so far this year and I also believe can move up 10% over the next 6 months and trading at the $50+ sector. The big names in this sector are Apple Inc. 12.70% Microsoft Corporation 9.76 Facebook Inc. Class A 6.48% and AT&T Inc. 6.30%
Apple has a big weighting on the sector so whilst the sector can move higher even if Apple stays still it would help if Apple can start moving higher, the stock is down 12% for the year and if it just gets back to even that would help XLK. Apple is due to report earnings 26th July and expectations are fairly low so if they can surprise on the upside the shares would move higher.
On the negative side Utilities have had a great year but I would not expect then to carry on going up at this rate and the rest of the year may be more sideways for XLU.
Regardless of your trading style it makes sense to keep on an eye on sectors as even if the overall S&P500 is flat you can be sure that money will be flowing to and from individual sectors. It’s also possible to make a pairs trade for example buy Healthcare (XLV) sell Utilities (XLU) you can also do this with put and call options.
Trading veteran Vince Stanzione has been trading for over 30 years and has produced a home-trading course at www.fintrader.net He stresses that before you try trading it’s worth getting some training. He is also the New York Times bestselling author of The Millionaire Dropout published by Wiley.
