Sector Analysis Summary - PRECISION TRADING LABS
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Sector Analysis Summary

December 13, 2021

There are two approaches to trades:

  1. Look to catch tops and bottoms to trade major reversals, or
  2. the more consistent way of identifying a valid trend, sometimes across timeframes, and going with the flow. Trade with the current and ride the wave of sentiment and institutional trading.

Trading isn’t easy. But trading WITH the market or a sector, whether it’s rising or falling, and not fighting the current, is certainly less difficult.

Below are Sector Performance charts summarizing last week (chart 1), followed by the past month (chart 2). Viewing sector performance through these two lenses helps us find trend-following, high probability setups:

Normally we separately comment on the shorter time span (Chart 1: 1-week/5 trading days) and the longer (Chart 2: rolling month/4-5 weeks), since they usually have different things to say. But not today:

In BOTH the past week AND the rolling month:
The healthcare sector (represented by the XLV ETF) and utilities (XLU) were the strongest sectors
The energy sector (XLE) was by far the weakest sector
This uniformity presents a confluence and paints a clear, unconflicting picture concerning shorter- and longer-term relative strength and weakness
The particular sectors at the top also raise some caution. There are typically three sectors exhibiting relative strength when the market starts getting cautious and there’s reduced risk appetite: (1) utilities, (2) consumer staples and (3) healthcare. All three sectors represent necessities for people to live their lives. They tend to be less cyclical, less price-elastic, and where consumers continue to spend after cutting back on other things. When there’s a desire to reduce market risk there’s often a rotation to these sectors. As a result, we should be wary and on the lookout for signs of this.

But for now, we’ll listen to the charts and follow the trend. Our plan this week is:

Look to the XLU and XLV and their underlying stocks for small-to-moderate pullbacks to get long when price bounces from demand zones and the bigger picture strength in these sectors continues.
On the short side, we will look to energy (XLE) and its underlying stocks. We’ll seek corrective rallies in order to short from a supply zone above.

Look for our preliminary list of potential trade candidates Tuesday and two high quality setups Wednesday before the market opens!

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