Sector to Watch on the Up & Downside

The market is holding on to support by it’s fingernails! Why? Everything points to the downside and yet the buyers keep stepping in as it sells. No one wants to miss out on the stimulus rally provided by the Federal Reserve. At this point, even if the Fed did something it would be anticlimactic. With that in mind lets look at some upside sectors worth watching and some downside as well.

Consumer Staples (XLP) is near the high. The break above $34.40 came at the end of a three month sideways trading channel, and it held the breakout keeping the uptrend in play. The leadership of this sector comes from the large cap dividend stocks that remain in favor, and to some degree are overbought. A sector worth holding for the short term with a stop at $34.20.

Utilities (XLU) look very similar and for a similar reason. The dividend of 4% from the sector made buying and holding the sector worthwhile. The upside has climbed nearly 9% to add to the dividend, and made it a solid performing sector over the last year. The outlook is more of the same from our perspective.

A cousin to the Utility sector is the Telecommunications (IYZ) sector. The uptrend off the June low has played out well the last six weeks. A move above $22.80 will eclipse the high from March and validate the uptrend short term. We continue to like the outlook for the sector and would look to add to positions on a break to a new high.

Healthcare (XLV) has been another solid performing sector off the June low. With the Healthcare bill upheld by the Supreme Court ruling the sector offers little in terms of surprises. The upside for the providers is bright based on the current data. IHF is a simple way to play the sub-sector overall. There is still upside for both the broad sector and the parts going forward. The Pharmaceutical stocks are another winner in the healthcare reform game. IHE broke above the $84.75 resistance and has continued higher. The one weak link is the medical devices (IHI), but they are worth watching near term for a follow through upside play. Last is the biotech (IBB) stocks which have been one of the clear winners this year on the upside. This is one of the stronger sectors of the market currently.

On the downside we could pick a list of sectors that continue to struggle based on the current market environment. The one to watch near term is technology (XLK) and the driving sub-sector on the downside semiconductors (SMH).  The SOX index broke below near term support at 362 and is in the process of testing the previous low near 350. The downside is attempting to put in a bottom since the June 4th low. After several attempts to move higher we are threatening the downside lows yet again. If they break lower the short side play is attractive with the next support at 325 for the index. Thus, there could be a potential move lower of 7-10%.

Energy (XLE) is a sector that has been under pressure due to the declining commodity prices. The price of crude has declined from $110 per barrel to a recent low of $76. With the geopolitical risk rising in Iran and the Middle East, the price has moved back above the $85 mark. Throw in a strike in Norway and the weekly inventory data showing a decline the price could continue to work back towards the $90-95 per barrel price range. If that is true and the perception is prices will rise and stabilize, it is worth watching the sector for an upside opportunity. Thus, this has been a downside moving sector that is finding near term support. That is worth watching for some upside follow through. If it doesn’t work out, the short plays could be equally rewarding on the disappointment.

The list wouldn’t be complete on the downside without talking about Europe (IEV). The downside risk remains with every headline of banks and sovereign debt issues. Europe, Spain, Italy and others have attempted to bounce off the June lows, but the recent challenges relative to a negative economy and GDP have prices testing the near term lows again. If they break lower the short play opporunities will be present. This remains one of the key trouble spots for stocks and sentiment. Watch as this plays out short term, and the directional play will present itself.

Regardless of market direction there is always somewhere to put money to work. The leaders are in place and moves higher are worth watching and trading based on specific disciplines. The downside is obvious and the opportunities to benefit from the moves lower are in play. Take it one day at a time and keep your focus on the discipline you must have to achieve your goals in a volatile market environment.