Strong Q1 financial results, leading to a further bullish rally on the market. What to expect from now on?

The stock market has been in massive uptrend in the past 13 months since March 2020.

It is important to mention that the massive bullish rally on all major US indices and stocks has happened exactly during the coronavirus pandemic that has led to an economic slowdown around the world and has caused lots of trouble for businesses and individuals. In fact, many businesses went bankrupt and lots of people lost their jobs because of the economic downturn. Yet, after the huge correction that occurred between February and March 2020, investors and traders saw that massive sell-off as an amazing buying opportunity where they could buy their favourite stocks and indices at a 30-40% discount. Logically speaking, investors started buying aggressively and that led to a massive bullish appreciation that has been going for over a year now.

Overall, the main reason for the continuation of the strong bullish rally has been the strong performance of the leading companies out there. As a matter of fact, many of the largest companies in the different sectors of the business have been reporting strong financial results during the pandemic and have been beating analysts’ expectations in the past 3-4 quarters. Apple for example set a new record for iPhone sales in Q4 of 2020 and reported a 40% revenue growth in the Q1 of 2021. We have seen better than expected results from Microsoft, Google, Amazon and Facebook. All those together with many more of the largest companies out there reported great results for the first quarter of 2021, further confirming their strong financial performance and market positioning.
In fact, usually those largest companies’ performance is very closely monitored by investors and traders and frankly said they tend to move the market.

In other words, we have only seen a few profit-taking corrections in the past 13 months that have been giving lots of great buying opportunities at a decent discount, motivating investors and traders to add their favourite stocks and indices to their portfolios and make high profits to the upside.

Today’s analysis will focus on the 10-year positive correlation between the Financial Select Sector SPDR Fund (XLF) and the Health Care Select Sector SPDR Fund (XLV), which stands at 75%.

We would also be looking at some of the biggest companies within the two ETFs and evaluate their recent performance, which would give us a chance to come up with some potential investment ideas and be able to maximize our followers’ profitability in the current market environment.

As you know, the Dow Experts have developed a modern-market approach, based on the Dow Theory and created by Charles Dow more than 100 years ago. Yet, while the basic Dow Theory was based purely on the correlation between the Dow Jones Industrial Average and the Dow Jones Transportation Average, our modern-market approach is based on more than 30 correlations, including all the other key sectors on the market, such as Technology, Services, Consumer discretionary and non-discretionary, Financials, Energy and others. Moreover, our modern approach includes the importance of both fundamental and technical analyses because we believe using a combination of both is vital for one’s success and profitability on the market nowadays. The correlation-confirmation model we have developed gives us a chance to identify market reversals, as well as trend continuation patterns, which in turn give us specific buying or selling signals, giving us a chance to benefit from both bullish and bearish markets.

The Financial Select Sector SPDR Fund (XLF) offers an efficient exposure to the largest companies in the US financial sector. In fact, the fund mainly concentrates on the biggest US banks and avoids small-cap stocks. Many investors claim that the XLF is the best ETF to follow as it gives them an easy access to the financial sector. The XLF has got $38 billion in assets under management at the moment and an average daily trading volume of $2 billion.

Actually, the leading US banks have been reporting quite strong results in the past year during the coronavirus pandemic. In other words, those leading financial institutions have kept on delivering strong financial statements even during the global economic slowdown caused by the virus. The leading banks in the US, such as JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs have all reported better than expected financial results for the Q1 of 2021. That in turn has been having a very strong bullish effect on the XLF and we have seen another strong spike recently. We are actually quite impressed by the performance of the leading banks and financial institutions in the US because they managed to perform very strong results for a few quarters in a row during the pandemic and besides the fact that interest rates in the US have been at 0% ever since. In other words, usually banks face difficulties when interest rates go down so low. Yet, they have kept on beating analysts’ earnings expectations and of course that has led to a massive bullish rally on their share prices, boosting the XLF as well.

Technical analysis

By looking at the chart of the XLF, one could see the massive uptrend that has been taking place in the past 13 months since the 20th of March 2020. Actually, the price has almost doubled during that period of time, rising from $19 to the current levels at $36. We saw a bit of a profit-taking interest in the end of January this year, which only led to a small correction from the $31.70 to $28.85 where investors and traders saw the price testing the key support mark at that point and started actively buying, which led to another massive upside movement where the price then broke the first key resistance at $31.70 to reach the current levels just above $36. As we mentioned earlier in the analysis, the strong Q1 financial results we have been looking at in the past month during the earnings season have been the strongest driver of the further continuation of the huge uptrend that has been going on the XLF. Most of the biggest companies have already reported their Q1 financial results. Therefore, due to the better than expected results across the board, the XLF has gone to quite some overbought territories at the moment. The RSI indicator has touched the 80 mark, while the Stochastics has gone to the overbought level and is about to cross down, giving some indications for a potential short-term correction.
Thus, based on the strong performance of the XLF recently, we would like to add it to our portfolio. Yet, we believe it is better to wait for a little profit-taking correction to the downside that could give us a chance to buy the leading ETF at a discount, which would then help us boost our profitability to the upside.
By looking at the daily chart, we could see the first strong support that is currently standing at $35 (broken resistance) where some buying pressure is likely to take place. Should the price break that first strong support, we would expect it to test the next key support mark at $34 where investors would be even more motivated to buy and that could lead to a strong bullish rally afterwards. Moreover, the 50-day moving average is standing at 34.50, right between the two key support levels, giving further bullish indications at that point.

In order to decide whether buying the XLF around the levels we mentioned above would be a reasonable decision, we would look into the recent performance of the other ETF we are analyzing – the XLV for a further confirmation for our bullish stance on the XLF.

The Health Care Select Sector SPDR Fund (XLV) dominates the US health care segment on almost every measure. The XLV is the oldest and largest fund in the segment with an extensive daily trading volume and liquidity, making it an unparalleled leader in the sector. The leading ETF has got $25 billion in assets under management and an average daily trading volume of $1.1 billion. Moreover, it is relatively cheap amongst its peers, making it a very affordable and at the same time attractive investment. The XLV is concentrated on investing in the biggest stocks within the health care segment, including Johnson & Johnson, Merck, Pfizer, AbbVie and others.

Technical analysis

The daily chart shows the strong bullish trend that has been going on the XLF in the past few quarters. In fact, the main reason for that have been the strong financial results reported by most of the companies the XLV invests in. In other words, the most recent rally on the price has been caused by the better than expected earnings for the Q1 2021, that has led to the price breaking a few key resistance levels to the upside, such as the $117 and the $120 to reach the $123 highs. Since then, we have seen a bit of a profit-taking correction that has already sent the price down to the current $121. In fact, the chart looks very similar to the one of XLF, where the technical indicators have gone to the overbought territory and giving short-term selling indications. The RSI and Stochastics have started heading lower from the overbought area on the XLV, confirming a potential short-term correction that could send the price to a strong support mark, giving a great opportunity to buy at a little discount and follow the overall uptrend, which is likely to continue in the near future. Actually, the $119 is the first key support mark that is expected to bring lots of buying pressure, followed by the next major support at $114-$115 where even more buying interest is likely to take place. In other words, the price is expected to bounce from one of those key support lines and we would be looking to take advantage of buying at those levels and making high profits to the upside.

Chart: XLV

We would start buying at around $120, just above the major support at $119. In case the price drops further, we would be interested in adding more to our buy positions at the next key support at $115 where more buying activity is expected to take place. Our initial profit-taking target would be set at $125-$128, followed by the next target at $135-$137 where we would be fully cashing in our profits.

Overall, we shall say the recent performance of the XLV clearly confirms our bullish stance on the XLF and we would be looking to add it to our portfolio.

Chart: XLF

We would wait for the price to make a short-term correction that could send the XLF towards the first strong support at $35 where we would be looking to open our first buy positions.
Should the price drop further, we would be interested in adding more to our buy positions at the next strong support at $32-$33 where lots of buying pressure is expected. Our first profit-taking target is set at $38-$40, followed by the next target at $44-$46 where we would be fully cashing in our profits and waiting for another profit-taking correction in order to follow the trend and make high profits to the upside.

In order to further assist our followers in boosting their investment results, we have analyzed the performance of some of the biggest companies within the XLV and XLF that have a big impact on the overall performance of the two ETFs.

You can find them in our Stock Picks for May rubric.


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