Energy and Utilities Exert Leadership?

The month of Aprils ends with the major indexes down, but is that good news for May? Following the rally of last week are we headed higher? Is a break above the previous highs in the cards? Technically there are some great setups short term for breakouts on the charts. Fundamentally earnings have been overall better than expected, consumer sentiment is improving and Wall Street sentiment has rebounded. Life is good and the markets on autopilot…right? Not so fast my friend. All of those things are true, but the market does remain in a trading range and we need some volume or conviction on the behalf of investors to lead the move higher. Thus, the key ingredient for May is patience.

Looking at my chart of the trailing five days of the S&P 500 index ten sectors, we see a push from the energy sector to take on some leadership (copper color line). The sector is even with the consumer discretionary sector off the April 23rd low or test of the bottom of the current trading range. This is a micro snap shot of  the market, but we are looking for rising leadership to the take the broad markets higher. The chart below of XLE, SPDR Energy ETF shows the two weeks of consolidation near the $68 low. The break above the $70 mark was a positive short and we added this to our portfolio on the move higher. $73 is the next target and resistance and then $76.20. To manage the risk of the trade we would move the stop to break even on the trade. if we were looking longer term the stop would be the previous low.

Earnings have been and are the catalyst to the move for the sector. Some merger and acquisition activity with Energy Transfer (ETP) buying the refiner Sunoco (SUN) on Monday helping as well  in the services sector. OIH, HOLDRs Oil Services ETF is still lagging on the bounce off the recent lows. However, XOP, SPDR Oil & Gas Exploration and Production ETF has moved up nearly 10% off the recent low. This is a sector challenged by the decline in commodity prices, but crude is trading near $105 currently. Natural gas has been a big drag on the sector falling from $4 to under $2 per BTU. Many, me included, believe the price will rebound and with the stocks. FCG, First Trust Natural Gas ETF is up nearly 8% off the recent low. Energy is one of the sectors on the rise and worthy of at least a short term trade.

Utilities is another sector that has been on the rise following the test of the low on April 23rd.  It is the purple line in the sector chart above. It is even with the index for the period up 2.3% and positioned to retest the previous high. The sideways trek since the beginning of the year was the push higher in interest rates. However, that has shifted the other direction thanks once again to the Federal Reserve wanting to keep rates effectively at zero. This was added to our portfolio on the test of the lows in December for the dividend (4.1% at the time) and the potential of a 5-10% capital gain. So far we are on track and the outlook short term remains positive for the sector.

Digging into the ETF for the leadership has resulted in some nice stock opportunities as well. Scanning the 32 stocks that make up the ETF last night showed some new setups in stocks worthy of a look. I added the 19 set ups to a WatchList in my Worden Telechart Club you can review and copy. If you are not a member send an email to Don@SectorExchange to get the link.

We are setting up for another mixed day of trading, at least at the open. Watch the test of the breakouts from Friday. If they fail, it is a negative short term for the broad markets. Watch XLY to follow through on the inside day and continue the upside move. If we test back the trading range remains in play and the lack of direction continues short term. Keep your stops in place and manage your risk.