In recent days, the equity markets have seen a rotation out from technology stocks (XLK) to “value” names that were hit hard during the COVID-19 pandemic. These “value” names were in sectors such as travel, airlines (JETS), hotels, financials (XLF), energy (XLE).

In my marketplace service The Naked Charts, I always stress the importance of placing a stop loss on each and every position. I use technical charts and price action to identify positions to enter that provide maximum risk-reward, and identify areas where the charts sour to place stop losses. Even then, when the market throws a tantrum, even the best-laid plans will take a beating. Yes, my recommended positions in focused sectors especially in Technology took a hit, but I believe this impact will be temporary.

Rotation is the lifeblood of the equity markets, and more sectors joining in the rally will improve the overall health of the sustainability of the broad market rally. Technology names might have taken a step back of late, but the strength of their overall uptrends is still second to none.

I expect the technology sector to snap back higher with a vengeance, and do not foresee a scenario where the S&P 500 (SPY) continues to climb at the expense of the Nasdaq Composite (QQQ). The most probable scenario is for both indices to climb higher in tandem, with the S&P 500 claiming a new record high in the process.

I have shared the technical charts on a few sectors that have broken out higher of late. These sectors are not the usual suspects such as technology, biotechnology and healthcare. I employ and highly advocate a top-down approach to investors and traders out there, to look for sector or country ETFs that are showing strength on the technical charts, before drilling in to find the most promising underlying stocks to invest in chart-wise.

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One of the sector ETFs I shared with my subscribers is that of the SPDR Financial ETF. The technical chart for XLF I posted on 27 July shown below looked extremely promising.

Essentially, XLF looked like it was making a resilient base via two bottoming formations – a double bottom, and another rounded bottom. The recent trading range for XLF had also tightened up then (in dotted lines), signalling a potentially explosive breakout. Due to the bullish bottoming patterns in play, the most likely direction for the breakout was higher.

Daily Chart: SPDR Financials ETF (XLF), posted on 27 July

Below is the chart of XLF as of 11 August:

Daily Chart: SPDR Financials ETF (XLF), as of 11 August

You may observe that XLF had indeed broken out higher from its trading range. In about two weeks, the recommended long position on XLF is up about 5%. Mind you, this is the performance for the ETF which holds a diversified portfolio of financial stocks. Hence, my suggestion to further drill down into choosing underlying stocks from the ETF that are showing high-potential technical charts, so as to potentially enhance the Alpha.

Another reason for being bullish financials is the extremely high net short positioning on the USD, as shown in the CFTC data below. The USD (UUP) has weakened of late in response to falling interest rates, pulling down financial stocks at the same time. An unwind in this overcrowded position will help push the USD and financials higher. This was detailed in my article “Silver Likely To Pull Back In The Short Term” written on 2 August.

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CFTC data on USD net positioning

With the S&P 500 a whisker away from making all-time highs, I think the index will soon notch a new record for the history books. We must however not lose sight that in the broader scheme of things, the index that has been the strongest since the March lows this year is undisputedly the technology-heavy Nasdaq Composite, which made new highs as early as June.

To bank on growth/technology names to continue sliding while value names continue to shine would be foolhardy. If we think back on the last time value names outperformed growth names on a sustained time frame, I will dare say that no memory comes to mind.

Since launching on 1 June 2019, my technical analysis service has banked an absolute return of +214.4% with 57 trade recommendations as of 12 August 2020 with an average holding period of 5.30 weeks per trade. Do check out my Marketplace Service at The Naked Charts!

Disclosure: I am/we are long GBTC, GDX, SHOP, ADBE, SPCE, EW, TGT, XLF, PALL, ASHR, JETS, TEAM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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