Is there room for a further growth?

It has been a pretty volatile year for the stock market. In the beginning of 2020 the coronavirus started spreading around and became a worldwide healthcare issue – a pandemic that caused lots of affections and deaths all across the globe. Therefore, all countries out there started taking necessary actions in order to prevent more affections and deaths. The different countries started closing their borders and not allowing people to travel, setting lockdowns and many other precautions in order to deal with the virus. However, that had a negative impact on the economy. Many businesses closed doors for a few months back in February-March, causing many people to lose their jobs and the whole pandemic situation in general has been very negative for the economy. Therefore, the stock market reflected on the negative news immediately and we saw a massive sell-off all across the board with the stock market in the US losing around 35-40% of its value between the 20th of February and the 20th of March.

The biggest losers during that period of time were airline companies as their business was hurt the most. The leading airlines in the US – Delta and American Airlines lost over 70% of their market value in about a month.
Yet, the huge correction gave an amazing opportunity for investors to buy their stocks very cheap and that by itself would then give them a chance to maximize their profitability to the upside. It was only a matter of time before the market bottomed out and started rising again.

A strong 9 month rally on the stock market

The stock market in the US then started rising strongly on the 20th of March and has been in a massive uptrend ever since. Some of the biggest companies out there have seen their stock prices keep rising and reaching new all-time highs and breaking new records. Therefore, those investors who took advantage of the massive sell-off early in the year were the ones that benefited hugely from the massive upside rally afterwards and this year has been very profitable for those intelligent investors and traders.

Let’s look at today’s picture. The market has kept on rising for almost 9 months now. We have seen some profit-taking corrections every now and then but the trend has remained strongly bullish. In other words, those short-term corrections have been giving more great opportunities for investors to benefit from and buy their favourite stocks, indices and ETFs at a nice discount and therefore be able to maximize their profitability to the upside.

Moreover, the recent news that came out, showing that Pfizer-BioNtech’s, as well as Moderna’s vaccines are over 90% successful against COVID-19 has been an additional bullish factor for the recent increase on the leading stocks and indices out there. In other words, investors and traders are positive that the vaccine is out there already and that would bring us to normal life again hopefully in the near future, motivating market participants to buy even more actively and push the market higher.

The performance of our recent analyses

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 November and some of our other recent picks:

  • Altria Group Inc. (MO) – bought at $36, it went up to $43.50 in 4 weeks = 21% return
  • Cisco Systems Inc. (CSCO) – bought $35.50, it went up to $45 in 4 weeks = 26.7% return
  • Kraft Heinz Co. (KHC) – bought $31, it went up to $35 in 4 weeks = 13% return
  • PayPal Inc. (PYPL) – bought @175, it went up to $35 in 4 weeks = 26.9% return
  • Advanced Micro Devices Inc. (AMD) – bought $75, it went up to $98 in 4 weeks = 31% return
  • Caterpillar Inc. (CAT) – bought @160, it went up to $183.50 in 4 weeks = 14.7% return
  • Broadcom (AVGO) – bought @360, it went up to $427 in 4 weeks = 18.3% return
  • Deere & Company (DE) – bought @229, it went up to $265 in 4 weeks = 15.7% return
  • Alibaba Inc. (BABA) – bought at $210, it went up to $320 in 16 weeks = 52.4% return
  • Nike Inc. (NKE) – bought $110, it went up to $140 in 8 weeks = 23.7% return
  • American Express (AXP) – bought @98, it went up to $125 in 4 weeks = 27.6% return
  • Delta Airlines (DAL) – bought @31, it went up to $43 in 4 weeks = 38.7% return
  • Take Two Interactive Software (TTWO) – bought @156, it went up to $203.90 in 4 weeks = 30.7% return
  • Keysight Technologies (KEYS) – bought @103, it went up to $127 in 4 weeks = 23.3% return
  • Electronic Arts Inc. (EA) – bought @124.5, it went up to $140 in 4 weeks = 12.4% return

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 9 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 has gone up from $15 to $89 (493%). 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 current $89 highs. Our previous recommendations to buy the leading ETF at $55-$60 have been extremely profitable for our followers and they have been making high profits to the upside in the past 6-7 months since May when we started recommending that the XLI is giving an amazing buying opportunity and a huge upside potential. In fact, the price is up 61% since we started buying it at $55 in May this year. Therefore, we would like to congratulate our followers who trusted our expertise again and that helped them maximize their profits on the way up.

We remain bullish on the XLI and the leading ETFs, stocks and indices out there, taking into account the fact that the recent news that came out showed that Pfizer-Biontech as well as Moderna’s vaccines are successful against the virus and they have already approved it in the UK and started using it, which is expected to happen in the US and the rest of the world very soon as well. In fact, that is a major reason why investors have remained positive for the stock market and keep buying and pushing prices higher even though the second wave of coronavirus is a lot worse than the first one and there are a lot more affections and deaths. Moreover, investors acknowledge the fact that historically speaking the stock market has been very bullish in December as the purchasing power increases before the holidays and people tend to spend a lot on gifts and presents for their families and friends, which in turn is very positive for the economy and the stock market in particular.

By looking at the daily chart of the XLI, one could easily see the huge bullish rally that has been going since the market bottomed out on the 20th of March. The XLI was trading at the $47.70 lows back then when investors realized that the recent sell-off caused by the virus back then is giving an amazing buying opportunity with a huge upside potential. So, market participants started buying actively at that point and have been pushing the price higher for 9 months now.


Technical side of things

The price made a profit-taking correction in the second part of October, dropping from the $82 only to reach the strong support at $74-$75 where lots of buying pressure took place and the price immediately bounced from that level. Since then, it has been in a massive uptrend, breaking a few key resistance levels to the upside, such as the $80, followed by the next one at $82 and $88. In other words, investors and traders are still very positive for the future direction of the stock market and the recent news around the vaccine together with the upcoming Christmas holidays are among the main reasons for the massive rallies to the upside. Historically speaking, the stock market has been quite bullish in December anyway for many years based on the above-stated factors.

The technical indicators have gone close to the overbought territory due to the massive bullish rally recently and we believe a short-term pullback on the price would be giving us a great entry level for our buy positions.

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 $28.70.

The first 10 days of December were very promising. By looking at the chart, one could see that the price bounced from the support at $27.90-$28 and managed to reach the $29 on the 9th of December. In other words, traders and investors have only been waiting for a short-term pullback on the price where the XLF dropped from the $28.70 to reach the $28 support and started buying aggressively at that point, further confirming the strong bullish rally that has been taking place on the chart in the past 9 months. In fact, the XLF is up 66% so far this year and is one of the best performing ETFs out there. The price formed a double top figure at the $29 resistance and the technical indicators are very overbought. Therefore, we believe there could easily be a short-term profit-taking correction from the current levels before investors start buying again at a strong support and pushing the price higher afterwards. So, we remain strongly bullish on the XLF in the longer run but would be waiting for a short-term correction that would give us a chance to buy at a strong support and benefit from the huge bullish rally that we have seen on the price so far this year.

Chart: XLF

We will wait for a short-term profit-taking correction that could send the price to the major support level at $28 where we would be interested in opening our first buy position. In case the price drops further we would be adding more to our long position at the next key support at $27 where we would be able to improve our average price and maximize our profitability to the upside. Our initial profit-taking target would be at $29-$30, followed by the longer-term target at $32-$33 where we would be fully cashing in our profits and waiting for another correction on the price that would give us a chance to buy the leading ETF again at a strong support and further maximize our profits to the upside.

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: XLI

We will wait for a short-term correction on the XLI and see how the price reacts once it tests the first key support line at $87. In case it fails to break it to the downside we would start buying aggressively at that point. Should the price break that level to the downside, we would be adding more to our buy positions at the next key support mark at $84-$82 so we could get a better average price and further maximize our profits to the upside. Our initial profit-taking target is set at $90, followed by the next target at $95-$96 where we would be fully cashing in our profits and waiting for another correction on the chart, which would give us a chance to buy again at a decent support mark and make more money to the upside.

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

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


Sincerely,

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