U.S. Sector ETF Portfolio – July 2, 2014

Our Conclusion

Technical breakouts in the S&P 500 and the DJIA over that last month or two has ignited a rally that has quickly approached its technical projections.  So now what?  Although it appears that there is still upside to be had, the risk in the market will appear more acute as the market climbs, if unabated or lack of a consolidation.  It will be important now to watch the macro markets as well as subtle clues to the behavior of equity markets may begin emerge.  For example there are a number of conflicting patterns unfolding in the U.S. Dollar.  The CBOE Volatility Index (VIX) needs to be monitored as a breakdown could correspond in some kind of speculation developing in domestic equity markets.

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.

US Sector ETF Portfolio Summary
J. Beck Investments

Vanguard Information Technology (VGT)–  On cue, VGT the relative strength weakness during Feb-Apr. 2014 landed support on its Apr. 2013 uptrend line.  This has set the stage for the next leg of outperformance.  VGT has now surpassed its Feb. 2014 peak, which is further confirmation of the continuation of its outperformance cycle.  We maintain an overweight but look for signs of the next rotation.  Initial support rises to 96.70 or the July 2014 break out level.

Vanguard Financials (VFH)–  From an intermediate-term perspective, the weekly relative strength chart points to a significant violation of support in Apr. 2014.  Failure to reclaim this breakdown level alludes to the continuation of an underperformance cycle. On the other hand,  the ability to move above this level helps to repair some of the damage, but bear in mind that it is not a signal a shift to a sustainable period of outperformance.

Vanguard Health Care (VHT)–  I am tweaking the tactical allocation to overweight largely due to the ability for VHT to trade back above its 2012 relative strength uptrend line.  Although some of the outperformance has been lost, this looks to be a sign of a sustainable move, at least relatively speaking.  From a price perspective, initial support moves up to the Mar. 2014 high (111.15), which also corresponds to the Jun 2014 breakout level.

Vanguard Consumer Discretionary (VCR)– Two positive developments have occurred recently that allows for a  more supportive tactical allocation.  The first is that the two-month relative strength trading range looks to have resolved itself as it has broken out of its May/Jun. 2014 highs.  The second is that the 10-week moving average (ma) has moved back above the 30-week ma.  So what once a bearish signal has now turned more constructive.

Vanguard Energy (VDE) –  From an intermediate to longer-term perspective the outlook for this energy focused ETF still remains favorable, at least from a portfolio context.  With no major signs of a technical reversal, it still appears that the recent setback is just that and not a decisive shift out of the sector.  With that said, I am maintaining the overweight until there is additional evidence of continued bearish momentum.

Vanguard Consumer Staples (VDC) – A Neutral portfolio allocation has to take the good with the bad. Notice over the past couple of years how VDC has traded (relative to the S&P 500) in a pretty choppy, but overall sideways fashion.  I believe that the recent underperformance over the last couple of months is more of the same when viewed from an intermediate-term perspective. I therefore feel that it is still not worth chasing at this point in time.

Vanguard Industrials (VIS)–  From a relative strength perspective, VIS has broken down from a trading range that lasted nearly 7-months.  Unless VIS is able to quickly trade back above this breakdown level, it would seem that money is flowing out of this sector ETF and into other areas of the market.  It is therefore advisable to take a more cautious outlook, in my view, and reduce exposure from Neutral to Underweight. its 2012 uptrend line.

Vanguard Materials (VAW) –  Unlike VIS, VAW’s relative strength  chart is still trading in a sideways fashion.  In fact, it appears that there is some kind of bullish pattern developing as well.  It would likely take a breakout above the Mar-Jun. 2014 highs to confirm a more favorable positioning.  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 the intermediate-term trend remains somewhat Neutral, in my view.  The price chart is showing potential signs of distribution as a negative outside week could be developing.  A close near the low end of this week’s trading range, currently at 93.76 would be a somewhat bearish technical indicator.

Vanguard Telecommunications Services (VOX) – A negative outside week during 6/2/14 is hinting at distribution forces at work.  The sharp May=Jun. 2014 relative strength decline is also a sign that VOX is not participating as much as other sector ETFs as the market climbs higher.  We therefore remain seated on the sidelines, so to speak until there is substantial technical evidence of a sustainable trend in place.  Initial support corresponds to the 6/26/14 low (86.76).

US Sector ETF Portfolio Appendix
J. Beck Investments

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