Sector Review: Grading the Week’s Rally

• Posted by Greg Harmon
• on December 4th, 2010

My Kindergartener came home with his report card yesterday. It did not have the typical A, B and C grades, but C, E and P. He was graded on Consistently achieving objectives, progress towards objectives as Expected, and needs more Practice to meet objectives. It got me thinking about how I would grade the SPDR sectors relative performance in the last week. Initially they seemed to fit into the old school grading system. But as I thought further, there are aspects of the new grading system that apply as well. Like the difference between kindergarten, where the focus is learning the objective using measurable objective criteria, and college, where the relative performance is often more important than whether you have learned the concepts, both are important.

All of the nine sectors participated in the rally this week, a good indication of breadth. All had gap ups on Wednesday and showed rising and improving Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators. But there were difference.

(As always you can see details of these individual charts and more on my twitter feed and on chartly.)

The A’s

There were two sectors that I would give A’s to were Materials Select Sector SPDR, XLB and Energy Select Sector SPDR, XLE. Their charts are below.

Materials Select Sector SPDR, XLB

Energy Select Sector SPDR, XLE

These sectors have been strong recently and proved their strength this week. Each has been above its 20 and 50 day Simple Moving Average (SMA) and extended that space this week. What distinguishes these sectors are the relative strength of their runs compared to the other sectors. For these two, the MACD crossed higher on Thursday and the moves were strong enough that these sectors are now peeking through the top of the Bollinger bands and now may need to rest. Most significant each day of the 3 day run extended the range by a good amount. A three day sprint higher. Obviously these sectors would get a C in the new grading system for effort to extend the rally.

The B’s

There were two sectors that just did not quite get there. They performed well enough to get a new school C, but were not quite as good as the A sectors. These were Industrials Select Sector SPDR, XLI and Consumer Discretionary Select Sector SPDR, XLY. Like the A sectors they had MACD crosses, extended their distance from the SMA’s and are peeking through the top of their Bollinger bands. But for these sectors the 3 day rally seemed to lose a little energy on Friday. This may be from reaching the top of the Bollinger band on Thursday and the early start of a consolidation process. The XLY chart is below.

Consumer Discretionary Select Sector SPDR, XLY

The C’s

Four sectors get this grade, Technology Select Sector SPDR, XLK, Consumer Staples Select Sector SPDR, XLP, Utilities Select Sector SPDR, XLU and Health Care Select Sector SPDR, XLV, each for different reasons. They all get C’s in the new grading system for advancing the rally. But something was missing. They have their MACD’s about to cross higher but stalled Friday well below the top of the Bollinger band with the RSI leveling below 60. This leaves plenty of room for more upside if the RSI can start to rise again, but did not match up to the A’s and B’s relative to last week’s move. The XLK and XLP had good moves up above the 20 day SMA and XLV was very similar to these two but did not advance on Friday. XLU should probably get a C-, barely passing. It showed great effort rising all three days, but could not break the 20 day SMA, which is sitting below the 50 day SMA. Below is the chart for XLK.

Technology Select Sector SPDR, XLK

The Future

Last week the rally was led by the sectors that have been the leaders recently, XLB, XLE, XLI and XLY, but they seem to be getting extended and tired. For the rally to continue further in a healthy manner the C’s, XLK, XLP, XLU and XLY need to work harder and get A’s going into year end. And what about Financials Select Sector SPDR, XLF last week? It participated and I would give it a D+ with an E on the new scale, but it was still stuck in Congress so it was not accepting grades.

Financials Select Sector SPDR, XLF

Trade well.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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