A potential buying opportunity?

The stock market in the US has been in a massive uptrend since the 20th of March this year. It is important to mention that we initially saw a huge correction all across the globe caused by the coronavirus outbreak where the market made a huge sell-off between the 20th of February and the 2nd part of March. In fact, the market lost on average around 35-40% of its value in 4 weeks caused by fear among investors that the deadly virus will lead to an economic slowdown and a big correction on the stock market. Well, it happened. The biggest companies out there, such as Apple, Facebook, Google, Netflix, Amazon etc. lost a big portion of their market value in only 3-4 weeks – a correction that we hadn’t seen for a long time. Even during the financial crisis the market the market took longer to lose 50% of its value between 2008 and 2009. The biggest losers when the pandemic of coronavirus started were airline companies. Delta and American Airlines for example are the biggest US airline companies. They lost around 70% of their market value in 3 weeks as countries and airports were closed, flights were cancelled and practically there was no business for the airlines. That was terrible for engine producers, such as Boeing as well and caused a massive reduction and a huge impact on their revenues and profits.

Yet, for those who didn’t have any stake on the stock market that correction was more than welcomed. In other words, the huge sell-off that caused the market to drop 35-40% in only a month was extremely favourable for intelligent investors who saw that as a great opportunity where they could buy their favourite stocks at a massive discount. So, the sell-off was over on the 20th of March and the market has been in a huge rally ever since. We have seen a huge appreciation all across the board where many of the leading companies out there have kept on reaching new all-time highs and breaking new records on the way up.

Let’s look at today’s picture. Actually, after the huge bullish rally in the past 6 months, we saw a bit of a profit-taking correction taking place in the beginning of September. Well, that was only logical taking into account the crazy bullish movement after the coronavirus outbreak. In other words, traders and investors collected some of the profits they had made to the upside which was only logical to expect, and that led to around 10% correction in the first 3 weeks of September. Yet, the market is on the rise again. Why is that? Well, the recent correction that occurred has given an opportunity for investors to buy their favourite stocks at a reasonable discount and follow the overall bullish trend. Moreover, the market is preparing for the upcoming earnings season this month where all publicly traded companies will be announcing their 3rd quarter financial results. As a matter of fact, those quarterly financial results have always been huge for the market. They bring lots of volatility on the market and amazing opportunities to benefit from. We at Dow Experts always look for such great opportunities that would help us maximize our followers’ profitability on the market and are very excited about the upcoming earnings season.

Thanks to our extensive knowledge and experience on the market, we have been helping our followers maximize the profitability in the short, middle and longer term. Let’s have a look at our results for the stocks and ETFs we recommended for the month of September:

  • FB bought @ $247 – 7% return so far for 3 weeks
  • NFLX bought @ $475 – 13.5% return so far for 3 weeks
  • ATVI bought @ $77 – 7% return for 3 weeks
  • GOOGL bought @ $1,470 – 7% return for 3 weeks
  • CRM bought @ $240 – 12% return for 3 weeks
  • NKE bought @ $110 – 19% return for 3 weeks
  • ADBE bought @ $468 – 10% return for 3 weeks
  • SBUX bought @ $82.50 – 10.30% return for 3 weeks
  • PEP bought @ $132 – 8.3% return for 3 weeks
  • BAC bought @ $23 – 11.7% return for 3 weeks
  • AAPL bought @ $110 – 10% return for 3 weeks
  • DAL bought @ $28.50 – 15% return for 3 weeks

Today’s analysis will focus on the 10-year positive correlation between the Industrial Select Sector SPDR Fund (XLI) and the Financial Select Sector SPDR Fund (XLF), which stands at 87%. We will also be looking at some of the biggest companies within the two ETFs and evaluate their recent performance in order to come up with potential buying ideas that would give a chance for our followers to benefit from the great bullish rally that has been taking place on the market in the past 7 months.

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 XLI tracks a market-cap-weighted index of industrial-sector stocks drawn from the S&P 500. It provides investors with an exposure to the industrial sector in the US that is cheap to hold and very easy to trade. The fund invests in companies within the S&P 500 by limiting its small and mid-cap exposure in order to concentrate mainly on the biggest industrial players on the market. The XLI provides a great exposure to the industrial sector in the US and it is suitable for both traders and long-term investors thanks to its impressive assets, high trading volume and a low expense ratio.

We have been analyzing the performance of the XLI for a long time now. We must say that the ETF has been a great representation of the overall performance of the industrial sector in the US. Due to the huge growth in the US economy over the past 11 years, the XLI had gone up from $15 to $85 (466%). Therefore, the XLI has been extremely profitable for those who like investing in ETFs and getting a direct exposure to one of the biggest sectors within the economy.

The XLI has been in a huge uptrend since it bottomed out from the lows at $47.70 on the 23rd of March this year. Ever since then, we have seen a massive rally on the chart that sent the leading industrial ETF towards the $80 highs in early September. In fact, the price was trading at $85 in early February just before the coronavirus’ sell-off started. In other words, the XLI has already reached those high levels again and is up almost 70% in the past 7 months.

We have been making high profits to the upside and have been waiting for short-term pullbacks that give us a chance to buy at a lower price and maximize our profitability to the upside. By taking into account the upcoming earnings season this month, we believe there is more money to be made to the upside at least in the next few weeks. We of course acknowledge the fact that the second wave of coronavirus might have another bearish effect on the market especially after the first immediate sell-off that occurred in February. However, short and longer-term strategies could be very different. We are bullish on the market for now during the earnings season and would be looking forward to the upcoming results that would show how the biggest companies have performed in the past 3 months and whether they have managed to keep doing well even during the coronavirus pandemic.

Let’s go back to the daily chart of the XLI. It is obvious that after the profit-taking correction in September traders have started buying at the support around $75 and pushing the price higher. The latest bullish indication on the chart was the fact that the price broke the key resistance level at $80.30-$80.40. Actually, the price struggled to break that level after attempting to close a candle above it twice in early September and then in the middle of the month. Therefore, the breakout above that level on the 9th of October just ahead of the earnings season gives us many reasons to believe that traders and investors are expecting strong results and are currently buying and positioning themselves ahead of the upcoming reports in order to maximize their profitability to the upside. Moreover, the technical indicators are still heading higher and giving further bullish indications to follow up on. Therefore, we remain positive for the XLI and believe it offers further bullish potential to the upside.

Yet, in order to decide whether buying at the current levels makes sense we need to analyze the performance of the XLF in order to get a further confirmation for our bullish stance on the XLI.

By looking at the XLF (Financial Select Sector SPDR Fund) we could see the huge uptrend that has taken place on the chart since the 23rd of March, similar to the XLF. In fact, the price has broken a few key resistance levels to the upside, such as the $22.50, as well $23.90 and the $24.50 to reach the current levels at $25.20.

The trading week ending on October 9 was very promising. By looking at the chart, one could see that the price clearly broke the key resistance at $24.50 and closed the daily candle above that level. In other words, the market signaled a strong bullish momentum ahead of the upcoming earnings season starting the week after. In other words, investors and traders are positioning themselves ahead of the earnings reports and would like to take advantage of the great potential bullish rallies afterwards. Moreover, the technical indicators keep heading higher and giving further positive indications that in turn confirm our bullish stance on the price. 

Chart: XLF

We will start buying the XLF actively at the current $25-$25.20 ahead of the earnings season. Should the price make a short-term correction to the downside, we would be interested in adding more to our portfolio at the next support marks at $23.50-$24, which would give us a chance to get a better average price and further maximize our profitability to the upside. Our initial profit-taking area is at $26.60-$26.70, followed by the next target at $28 where we would be fully cashing in our profits.

After analyzing the performance and the price actions of the XLF, we should say that this clearly confirms our bullish stance on the XLI and is giving us a further confirmation that buying at the current levels would give us a chance to maximize our followers’ profitability to the upside.

Chart: Industrial Select Sector SPDR Fund (XLI)

We will start buying the XLI aggressively just above the $80.30 support (broken resistance). In case the price makes a correction in the short-term we would be interested in adding more to our buy positions at the next key support at $78.60. Our initial profit-taking target is set at $84, followed by the longer-term goal at $88 where we would be fully cashing in our profits.

In order to help our followers maximize their profitability, we have decided to analyze the performance of some of the biggest companies within the two ETFs (XLI & XLF).

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


Sincerely,

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