U.S. Sector ETF Portfolio: August 10, 2014

Our Conclusion

There is always a battle going on between the bulls and the bears, but at key inflection points it is not always clear as to which has the advantage.  I think that at this juncture in the market, there may be at least one thing that the bulls and the bears can agree on, and that is that momentum clearly appears to be slowing.  The simplest way that I can express this from a sector point of view is to direct you to the number of 10-week moving averages in these sector ETFs that have been flattening or falling over the last month.  I never rely on one indicator in isolation, especially one as benign as this, but this has now moved up a notch in my monitor list.  See my latest SPX blog for another perspective.

Our Methodology

A rigorous ranking methodology was used to select among broad based benchmark US sector ETFs.   For the purposes of this asset allocation portfolio, ETFs tracking a strategy index methodology designed to “beat the market” or “become a market” were excluded from our selection process.    Only ETFs that track benchmark indexes are eligible and ranked according various factors including costs, efficiency, breadth, and liquidity.  It’s easy to pick the wrong ETF, but it’s not necessary.

Our Mission

The goal of our sector allocation will be to tactically outperform the S&P 500 on a relative basis1 using ETFs selected based on a proprietary ranking methodology.

Vanguard Telecommunications Services (VOX) – Choppy relative strength keeps me on the sidelines for the time being.  I will be tracking this sector closely for subtle shifts in market psychology and sector rotation.  It appears that investors are neither overly optimistic or pessimistic about this area of the market at the time being.
J. Beck Investments

Vanguard Information Technology (VGT)–  On cue, the relative strength weakness of VGT during Feb-Apr. 2014 landed support on its Apr. 2013 uptrend line.  This has marked the start of the next leg of outperformance.  The recent higher high  on the relative strength chart suggests the continuation of the outperformance.  Weakness should be viewed as temporary for the time being.   Initial support remains near the Jul. 2014 low of 95.82.

Vanguard Financials (VFH)–  From a relative strength perspective  a clearly defined downtrend channel is still intact, indicating a continuation of the underperformance until this channel is negated.  A violation of the bottom of the channel could spur additional relative weakness.  Our portfolio will allocate with the trend. From a price perspective  VFH looks to be encountering a test of its 2011 uptrend line in the mid-40s.

Vanguard Health Care (VHT)–  Although a negative outside week pattern developed during 7/28/14, from the context of this tactical portfolio, the ability for VHT to trade above its 2012 relative strength uptrend line suggests that an overweight stance is warranted.  In other words, the dominant trend remains favorable.  From a price perspective, although initial support is near 108.50, the first key test is closer to the low-100s or near the 2012 uptrend line.

Vanguard Consumer Discretionary (VCR)–The log chart clearly shows how VCR violated its 2011 uptrend line back in May 2014.  The following rally interestingly failed to reclaim this uptrend line.  I therefore continue to monitor this trend for further confirmation. From a relative strength perspective, I believe that it is important to monitor the Jun-Jul 2014 lows as a violation of this support may indicate that its time to become a bit more defensive.

Vanguard Energy (VDE) –  From an intermediate to longer-term perspective the outlook for this energy focused ETF still retains a relative strength advantage, as evident by the 2012 downtrend channel breakout.  With no major signs of a technical reversal, it still appears that the recent setback is just that (a setback) and not a decisive shift out of the sector.  Advise maintaining the overweight until there is additional evidence of continued bearish momentum.

Vanguard Consumer Staples (VDC) – Although this 2011 uptrend line is still in tact, it appears that a test this uptrend near 110 could be in the making. The weak oversold rally over the last week or two stresses my case.  Relatively speaking the broad and rather choppy sideways motion over the last 3-years warrants a neutral allocation.  It doesn’t seem worth the chase at this point in time.

Vanguard Industrials (VIS)–  From a relative strength perspective, VIS recently broke down from a trading range that lasted nearly 7-months.  The money flow out of this Industrials sector ETF has so far been vicious.  The technical bounce over the last week however still seems too premature to conclude that the underperformance has ended.  A cautious stance is still warranted in my opinion.  Initial support corresponds to the Aug. 2014 low (98.51).

Vanguard Materials (VAW) –  Unlike VIS, VAW’s relative strength  chart is still trading in a sideways fashion.  In fact, it is now testing the top of the 5-month trading range.  A breakout above this trading range would help to confirm a more favorable positioning.  Until then, a neutral allocation is advised. When managing your risk, keep in mind that the late-May 2014 breakout from the 2-month consolidation pattern projects a target into the 115 area.

Vanguard Utilities (VPU) – Despite the rather choppy relative strength chart over the past month or so VPU still trades above its 2014 low.  The price chart is showing potential signs of distribution as a negative outside week developed during 6/22/14 and 7/28/14, which needs to be monitored closely.  One potential near-term positive is the potentially bullish weekly hammer pattern that developed last week.

Vanguard Telecommunications Services (VOX) – Choppy relative strength keeps me on the sidelines for the time being.  I will be tracking this sector closely for subtle shifts in market psychology and sector rotation.  It appears that investors are neither overly optimistic or pessimistic about this area of the market at the time being.

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