The market started rising again ahead of the earnings season. Does it look attractive to buy at the current levels?


The US stock market has been in a massive uptrend in the past 12 months since the end of March 2020. Since then, we have seen the leading stocks out there more than double their value, while some stocks have tripled and quadrupled their share prices ever since.
As we mentioned in our other ETF analyses for this month, investors and traders have been positive for the stock market ever since and have been buying stocks cheap after the massive correction that occurred in February last year, sending some of the leading stocks out there down 35-40% on average.

In fact, after taking some profits in early 2021, we have noticed an increased buying activity again all across the board, mainly due to the investors’ interest in owing their favourite stocks at a good discount and all those profit-taking corrections have been motivating market participants to buy stocks at a nice discount and follow the overall bullish trend the market has been in the past year.
The good news around the vaccines is also giving some more positive reasons to buy stocks as investors are more positive about the future direction of the stock market.

Moreover, investors are currently preparing themselves towards the upcoming first quarter earnings results in April and that’s why there has been an increased buying activity on the biggest stocks as well as indices and ETFs out there.

We have been analyzing the financial performance of the leading companies in different sectors and most of them have performed very well even during the pandemic in 2020, beating analysts’ expectations and delivering very solid results regardless of the economic slowdown that followed.

In fact, that could be seen by analyzing the last few quarters’ reports where the leading companies beat analysts’ expectations and that boosted their share prices afterwards. Thus, based on the strong financial performance in the past few quarters, we believe the Q1 results could also come out better than expected and that would help the stock market reach new highs in the next few weeks and months. Therefore, we remain bullish on the market and will be looking to add some more of the market leading stocks to our portfolio in order to further boost our profitability to the upside.

Today’s analysis will focus on the 10-year positive correlation between the Financial Select Sector SPDR Fund (XLF) and the Consumer Discretionary Select Sector SPDR Fund (XLY), which stands at 86%. We would also be looking at some of the biggest companies within the two ETFs and examine their latest performance in order to come up with some potential buying ideas ahead of the earnings reports in the next few weeks.

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. For many investors and traders out there, the XLF is the best ETF to follow that 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.

As a matter of fact, the leading US banks have been performing 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. Since the biggest banks would start reporting their earnings from the 14th of April onwards, we believe that would give us a chance to benefit from their strong financial and market positioning and make high profits to the upside. Let’s look at the chart.


Technical analysis

By looking at the daily chart, we shall say the XLF has done a great job over the past year. The price bounced from the $17 lows in the second part of March when the market bottomed out to reach the $35 highs in March exactly a year later – on the 18th of March 2021. In other words, the price has exactly doubled in 12 months and that has been very profitable for investors and traders buying the XLF and following its great performance ever since. As a matter of fact, the price is now trading at just above $34 and is close to testing the key resistance at $35. In case of better than expected quarterly results in the middle of this month we would expect the price to break that strong resistance and reach new highs afterwards. Besides buying individual stocks from the financial sector, we would be interested in adding the XLF to our portfolio ahead of the earnings season. Yet, since the price is currently forming a double top at the strong resistance around $35, we would prefer to wait for a little profit-taking correction before we buy the XLF. In case of a profit-taking correction the leading ETF is likely to test the first strong support at $33, followed by the next major support at $31.70 where more buying pressure is expected.

The 50-day moving average also matches with the support at $31.70 and is currently just above that level, while the 100-day moving average is currently standing at $30.70, giving further bullish indications at that level.

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 XLY for a further confirmation for our bullish stance on the XLF.

The Consumer Discretionary Select Sector SPDR Fund (XLY) tracks a market-cap-weighted index of consumer discretionary stocks drawn from the S&P 500. The XLY concentrated on US large-cap stocks and has got $19 billion in assets under management with an average daily trading volume of $718 million.

By looking at the daily chart, one could see the massive uptrend that has been taking place on the XLY over the past 12 months, where the leading ETF has gained 113% from $81 in March last year to the highs at $173 in the beginning of February this year. In other words, the XLY has been following the overall bullish trend on the market and has more than doubled in 12 months. The price has then made a profit-taking correction to reach the strong support at $155 where it faced lots of buying pressure and traders have been taking advantage of that correction in order to buy at a nice discount and at a strong support mark and follow the overall bullish sentiment among investors.

Since the price bounced from the key support at $155 in the beginning of March we have seen lots of buying pressure in the past month, sending the price to the current levels at $169. The technical indicators keep heading higher and pointing for a further bullish potential especially during and after the earnings season. The lower Bollinger band matches perfectly with the support at $155 and is giving further bullish indications, while the diagonal support matches with the horizontal support exactly at that point. Overall, we believe traders would be interested in buying the XLY actively at around that strong support mark and that could easily lead to a massive bullish reaction again from that level. Even if the price manages to break that level to the downside, there is expected to be even more buying pressure at the next strong support at $141.


Chart: XLY

We would start buying the XLY at the first strong support at $155. In case the price breaks that level and drops further we would be buying even more aggressively at the next key support at $141 where more buying pressure is expected and it would give us a chance to get a better average price and further maximize our profitability to the upside. Our first take-profit target is set at $170-$175, followed by the next target at $185-$190 where we would be fully cashing in our profits.


Overall, we shall say the recent performance of the XLY clearly confirms our bullish stance on the XLF and we would like to add it to our portfolio ahead of the earnings reports this month.


Chart: XLF

We would wait for a little correction on the price and start buying around the first major support at $31.70. In case of a further drop in the short-term we would be buying more aggressively at the next strong support at $29 in order to improve our cost basis on the buy positions. Our first take-profit target is set at $34-$35, followed by the next target at $40-$45 where we would be fully collecting our profits.


In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we have analyzed the performance of some of the biggest companies within the XLF and XLY that have a big impact on the overall performance of the two ETFs.

You can find them in our Stock Pairs for April rubric.



Sincerely,

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