U.S. Sector ETF Portfolio – June 16th, 2014

Our Conclusion

Broad equity markets look like a case of good news, bad news. The good news are the technical breakouts in the S&P 500 and the DJIA. As I am not seeing any major signs of a reversal, further upside appears likely. It will be the manner of how we reach these levels that holds the key for what could be the bad news. Optimism is at high levels and the VIX is signaling complacent market. Despite this, I am still bullish and think that the market goes higher from here but a pause and a pullback would help alleviate an overbought condition, enabling a more healthy continuation of the bull market. If the market continues to heat up, then the chance of a speculative top rises.

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.

 

J. Beck Investments US Sector ETF Portfolio Summary
J. Beck Investments US Sector ETF Portfolio Summary

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 sharp spell of outperformance since.  The key now will be for VGT surpass its Feb. 2014 peak to make another higher high and reaffirm the continuation of its outperformance cycle.  Initial support now resides near 93 or the May 2014 breakout level and the Jun. 2014 pivot low.

Vanguard Financials (VFH)–  The weekly relative strength chart is witness of what looks to be a significant violation of support in Apr. 2014.  This would suggest that the outperformance be intermediate-term in nature.  The ability to reclaim this breakdown level helps to repair some of the damage but it is not a signal on its own that a wave of outperformance has begun or even that the underperformance has ended.  More work may be needed.

Vanguard Health Care (VHT)–  The man driver to the Neutral allocation is what appears to be a violation of the 2012 relative strength uptrend line in Apr. 2014.  This is a sign of a change in trend but it doesn’t necessarily mean that this change is a reversal to underperformance.  Recall that sideways (i.e. Neutral) is a directional trend as well.  I believe that a move below the Apr. 2014 relative strength low is required before a more cautious stance is adopted.

Vanguard Consumer Discretionary (VCR)– The 10-week moving average (ma) is still trading below the 30-week ma, but now have both begun to slowly trend higher over the last week or two.  However, relative strength readings continue to deteriorate and from the weekly chart it appears that VCR could be on the verge of another technical breakdown.  There also looks to be a potentially bearish distribution top pattern developing.

Vanguard Energy (VDE) –  So why does this energy ETF look so good, at least from an intermediate-term perspective?  To address this I would again like to call attention to this technical breakout of this 2-year downtrend channel.  This signaled a turnaround and drives the sector allocation.  With that said, I must admit that even I am impressed by its relative outperformance.  With no signs of a reverse the tactical allocation remains unchanged.

Vanguard Consumer Staples (VDC) – Talking outside the box for a moment, but is last week’s negative outside week going to mark the head of a potentially large, year-plus, head and shoulders top?  Time will tell.  For now however, the intermediate-term relative strength chart is generally sideways and probably not worth chasing, in my view.  Another month or two of weakness may change my mind, especially if the 2012/2014 lows were violated.

Vanguard Industrials (VIS)–  Although there appears to have been a breakout from a 7-month accumulation pattern, VIS needs to maintain support at this breakout level near 103 on this pullback.  From a relative strength perspective, sideways trading form much of this year is still supporting a Neutral tactical weighting, but rom a look at the weekly chart, one can surmise that an inflection point has arisen as VIS now approaches its 2012 uptrend line.  This will be a key test.

Vanguard Materials (VAW) –  The late-May 2014 breakout from the 2-month consolidation pattern is pointing higher prices.  A technical projection is to the 115 area.  A pullback to the breakout level near 109 should provide a good entry level, at least from a risk/reward perspective.  In the context of a sector portfolio, the relative strength readings are still pointing to a Neutral allocation.  Resolution of this sideways movement could be enough to alter that allocation.

Vanguard Utilities (VPU) – Despite the weakening relative strength chart over the past month or so the intermediate-term trend remains somewhat Neutral, in my view.  The price chart is getting interesting as a potential double top looks to be forming.  Neckline support would be near the May 2014 low (89.99).  A violation of this support coupled with continued weak relative strength could signal a more sustainable shift out of this defensive sector ETF.

Vanguard Telecommunications Services (VOX) – A negative outside week during 6/2/14 is hinting at distribution forces at work.  There are also signs 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.  Formidable support remains in the upper-70s.

J. Beck Investments US Sector ETF Portfolio Appendix
J. Beck Investments US Sector ETF Portfolio Appendix

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