Playing Follow the Leaders

Retail continues to lead the major sectors. The SPDR Consumer Discretionary ETF (XLY) is leading the 10 major sectors of the S&P 500 index since the low on November 15th. Despite all the rumors, warnings and uncertainty surrounding the sector the data has improved steadily as the consumer spends enough to keep the economic picture positive. Breaking the sector down, we find divergence in the parts. For example the Specialty Retailers are essentially trading sideways, but Media has been one of the leaders as print and electronic media seem to have turned the corner on profitability. Restaurants have been week, but the discount store are doing well. There are the big box stores like TJ Maxx  and Best Buy doing well, while Sears and JC Penny’s can’t get it together. Thus, this has been a stock picking sector as well as specific sub-sector or industry groups that have provided the key leadership. Regardless it has been an easy sector to track in a broad view, but it has offered just as many opportunities digging into the parts.

Energy is another sector that has found a way to come out on top despite the global economies slowing. The slowing growth impacts demand, which in turn impacts prices. Even with that thought in mind, look at oil prices which are moving back above the $96 per barrel level. This is something we discussed as oil attempted to pullback below the $90 per barrel price a few weeks back. That move lasted all of three days and then started back towards the previous highs of $98 per barrel. On Wednesday oil closed at $96.58 a barrel. The impact to OIL has been a solid gain of nearly 4.5% over the last four trading days. The refiners were leading the sector higher until prices tumbled… does that mean they will benefit from the higher prices again? I would believe that to be true. The refiners are in the Exploration and Production ETF, XOP. Natural gas has been moving higher on the commodity level again with UNG gaining more than 20% since testing the low in February. The broad sector Energy ETF, XLE is trading near the high of $80 currently as well. This is another sector where the parts are worth digging into and determining which you would rather own. You can own the whole (XLE) or you can own the parts based on the leadership.

Utilities is yet another of those sectors that analyst kept downgrading and stating the sector was overvalued and couldn’t any higher near term. That was 15% ago along with a 4% dividend. XLU, SPDR Utilities ETF broke from consolidation and push to a new high off the November low. There are stocks within the sector that have done even better. By simply scanning and looking for the leadership it was easy to turn up Centerpoint and NRG. Is there still room for the upside to continue? Absolutely the coal to natural gas conversions are still in process along with global expansion. This sector is also seeing activity in the alternative energy space become stronger. TAN, solar energy ETF and FAN, wind energy ETF, are both becoming bigger players in the utility space as an alternative to generating electricity. Using XLU has benefited the investors nicely over the last four months.

I have been teaching webinars and doing interviews in the media the last couple of weeks, and the discussion keeps coming back to this theme of tracking the sector trends and finding the leadership. You can accomplish this by looking at the major indexes or asset classes and investing in the ETFs that match those major components of the market, or you can break it all the way down to the individual stocks that are leading those specific asset classes or indexes. It is a matter of investment preferences and time horizons as to which will work best for your personality. Remember this is not about the best performance it is about accomplishing your goals and sleeping soundly at night.