Some sectors have been selling off very quickly compared to the market as a whole. This could be a sign of underlying weakness, but Janney analyst Dan Wantrobski says it means there are good chances to buy in the near future.
Wantrobski told his clients on Friday that he was seeing some big changes in the relative strength of different sectors. This was because some of the major large-cap benchmarks were continuing to move higher even though the number of stocks in those sectors was decreasing.
“This gives traders some chances to see the mean return going into the second half of June and into July,” he said.
One example is the Financial Select Sector SPDR exchange-traded fund XLF, which tracks the financial sector of the S&P 500. It has been pulling back lately because of weak economic data that has caused Treasury yields to fall and some people to worry about an economic slowdown.
When longer-term rates go down, banks tend to be weak, especially when shorter-term rates stay the same. This is because the spread they earn between longer-term assets, like loans, that are funded by shorter-term liabilities goes down.
The SPDR financial ETF has lost more than 4% since May 17, when it hit a high of $42.49. In the same time period, the S&P 500 SPX has gained more than 2%.
On a chart, this shows how weak XLF is compared to the S&P 500:
You can see that the XLF/SPY ratio has been going down since it broke down. However, it has recently entered oversold territory on a short-term basis, Wantrobski wrote. “This makes us think that the ETF could do better in the future through mean reversion higher on the chart above.”
The Industrial Select Sector SPDR ETF also tracks the XLI sector, which is the industrial sector:
Wantrobski said that the XLI/SPY chart is heading down but is quickly becoming “deeply oversold.”
“We think there will be a change that leads to some mean reversion higher (relative outperformance) in the next few weeks,” Wantrobski wrote.
The Energy Select Sector SPDR ETF then tracks the energy sector XLE:
According to Wantrobski, the recent drop in crude prices around the Memorial Day holiday weekend has made the XLE more oversold compared to the rest of the markets.
Because of this, he thinks the sector may also see a “mean reversion” rally in the next few weeks.
When the economy is growing and demand is rising overall, sectors like finance, manufacturing, and energy tend to do better. Many people see them as a sign that things are about to slow down when they don’t do as well as they should.
If you look at it from Wantrobski’s point of view, the sectors’ relative weakness is part of bull-market pullbacks.
At the same time, investors who want to get in on the AI boom have been buying up semiconductors like crazy.
The VanEck Semiconductor ETF SMH went up 0.3% on Friday afternoon, putting it on track for its fourth record close this week. The price has gone up 34.6% since April 19, when it hit a two-month low. The S&P 500 has also gone up 9.2%.
The SMH has done better than the S&P 500 so far in 2024, as shown below:
“The SMH/SPY ratio above is starting to press toward overbought territory on a short-term basis; however, it is not yet extreme and can continue to climb over the near-term in our view,” Wantrobski wrote.
“That being said, at some point we are very likely to see some cooling here via mean reversion lower — which would serve to reduce any overbought technical pressures on the charts,” he added.
