U.S. Sector ETF Portfolio – July 21, 2014

Our Conclusion

I just want to take a moment to point out to users of this Guide that there are a number of takeaways to be had from this report that investors can use to their advantage.  The first is the obvious use of building a domestic equity sector portfolio with ETFs designed to outperform the S&P 500.  The second is that the ETFs chosen for this purpose have undergone a rigorous ranking methodology designed to select the best true benchmark ETF.  Another less obvious reason is that this is a great tool for stock pickers as it can help them narrow the field and focus their stock selection in the sectors that I believe have the greatest tactical advantage.

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, 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.  Last week VGT surpassed its Feb. 2014 relative strength peak. This higher high patter is further confirmation of the continuation of its outperformance cycle.  Initial support no corresponds o the Jul. 2014 low of 95.82.

Vanguard Financials (VFH)–  Earlier this month VFH flirted with another relative strength breakdown, but has so far managed to find support near its May 2014 low.  A violation of this relative strength support level will reaffirm the tactical underweight. From an intermediate-term perspective, the year long relative strength downtrend channel suggests that any periods of outperformance are likely to only be contra trend rallies and unsustainable.

Vanguard Health Care (VHT)–  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.  Although the outperformance has slowd of late, the dominant trend still 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)–I hesitate to become more bearish at this moment, but I will note that the technical outlook is becoming a bit more concerning.  For example, the monthly chart shows the violation of the 2009 uptrend relative strength line.  As this does not necessarily prove an immediate shift from overweight to underweight, I remain on the sidelines for now.  A move below the Apr. 2014 relative strength low may prove to much to bear however.

Vanguard Energy (VDE) –  From an intermediate to longer-term perspective the outlook for this energy focused ETF still remains favorable, 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.  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 fairly 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, last month VIS broke 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.  I maintain a cautious outlook as VIS is now testing its recent pivot low.  A violation of this relative strength support warns of additional weakness to come.

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 developed during 6/22/14.  On the other hand, a 7/18/14 positive outside day is a sign of near term accumulation.  Keep in mind that the larger weekly patterns tend to override the shorter, daily patterns.

Vanguard Telecommunications Services (VOX) – From a relative strength perspective VOX could be in the midst of a sustainable shift for the positive after over a year of consistent underperformance.  This is evident as a higher low pattern may be developing.  However, it will take a move above the recent May 2014 high to solidify a change in technical leadership.  Until that that time a Neutral allocation is warranted.

Best,

Jonathan Beck

US Sector ETF Portfolio Appendix
J. Beck Investments

 

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