Are these two ETFs a good bargain at the current prices?

It is the beginning of May 2020 and the stock market in the US has already recovered a lot of its losses caused by the coronavirus outbreak earlier this year, leading to a lot of fear among investors and a huge sell-off across the globe.

Thus, the biggest companies out there lost quite a lot of their value because of that huge correction to the downside. We have seen most of the biggest companies lose 30-40% of their market capitalization, while some others lost up to 70% of their value when the market dropped significantly between the middle of February and the second part of March. Yet, it has been more than 2.5 months since then and the situation with the virus is getting better day-by-day. We have been seeing quite a lot of improvement across the globe and different countries have started getting out of the quarantine and letting businesses operate and people go back to work again, which is a signal that the situation is slowly going back to normal. Thus, investors have gained more confidence and have been realizing that those corrections the coronavirus has caused could be an amazing buying opportunity where they would be able to invest in the world’s biggest companies at huge discounts. Here it is important to say that we had been in the longest bullish rally in the history of financial markets – almost 11 years of rising prices without a major correction that has occurred after the financial crisis of 2008. In other words, the stock market started rising in 2009 and had been extremely bullish up until the beginning of 2020. Actually, due the huge bullish rally on the market during that period we never saw the biggest indices in the US- the Dow Jones and the S&P 500 make a significant correction to the downside. Thus, we believe the correction that has occurred because of the coronavirus pandemic is giving us amazing buying opportunities that we have not had for almost 11 years.

Today’s analysis will focus on the strong positive 10-year correlation between the Industrial Select Sector SPDR Fund (XLI) and the Financial Select Sector SPDR Fund (XLF), which currently stands at 87%. 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.

By looking at the daily chart on the XLI, one could see that the leading industrial ETF started dropping from its $85 highs in the middle of February to reach the lows at $48 on the 23rd of March. That 44% correction on the price to the downside was caused by the huge sell-off due to the investors’ fears with the coronavirus pandemic spreading all around the world and causing many affections and deaths. Yet, as soon as the price hit the $48 lows investors started buying aggressively at that point and we have seen it rise towards $64 already. In other words, intelligent investors and traders saw this huge correction to the downside as an amazing buying opportunity, which they hadn’t seen for more than 11 years. Moreover, there was another very important fundamental reason for investors to gain more confidence in buying so low – the Federal Reserve took the necessary measures and cut interest rates to 0% and announced a $2.3 trillion quantitative easing program where it will be buying back bonds and injecting money in the economy in order to support the business get out of the current economic slowdown that has been caused by the coronavirus pandemic. All technical indicators had gone to the oversold territory and started crossing up and giving buying indications to follow up on as well. Therefore, investors became more confident and realized that this could be an amazing buying opportunity at a 44% correction from the highs the price had reached back in February. So, the logical actions followed – the majority of investors started buying at that level and pushed the price 33% higher in less than 3 weeks. On the way up the price has managed to break a few key resistance levels, such as the $56, followed by the next major resistance at $60. We have been closely following the performance of the XLI in the past few weeks and it actually tested the key support (broken resistance) at $60 quite a few times ever since. However, there has been a lack of selling activity at that point and the price has been consolidating just above $60 in the meantime. The technical indicators have turned bullish already and that could easily be seen by looking at the RSI and Stochastic indicators. Furthermore, the middle Bollinger band line is staying just above $60, while the 38.20% Fibonacci retracement level matches perfectly with the key support line at $60 and is giving even more bullish indications. The 38.20% and 50% Fibonacci retracement levels show that the price has already made a profit-taking correction and give us a signal that we can expect a further increase on the price as soon as the price reaches either of these 2 levels, which would give us a chance to follow the bullish rally that has been taking place lately and maximize our profit potential to the upside.

The XLI is still trading at a 27% discount from the highs it reached before the coronavirus pandemic and the huge sell-off that followed. Therefore, we believe the current price trading at the key support mark at $60 where lots of bullish pressure is expected to take place is giving us a very good buying opportunity, which would give a chance to our followers to maximize their profit 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 should say that the correction that had taken place after the coronavirus sell-off was exactly the same as the one of XLI – 44%. The XLF offers a very cost-effective liquid exposure to the heavyweights in the US financials segment, consisting of mainly the largest banks and financial institutions, avoiding exposure to small-cap stocks. The XLF invests in the biggest banks out there, such as JP Morgan Chase, Bank of America, Wells Fargo, Citigroup, American Express and others.

Logically speaking, when the market started falling significantly in February that had a negative impact on all individual stocks, indices and ETFs out there. Therefore, the XLF dropped from $31.40 to $17.50, led by a huge buying activity taking place at the extremely oversold levels at $17-$18, which matched with a strong historical support mark at that point, which was created back in 2016 and has been bringing lots of buying pressure at that point. Following the FED’s monetary policy actions and cutting interest rates as well as injecting money in the economy, investors started buying the XLF at the support mark at $17.50 where all the technical indicators had been extremely oversold and giving lots of bullish indications. Similarly to the XLI, the price broke a few resistance levels to the upside and reversed its strong uptrend, bringing the price towards the $24 highs. By looking at the daily chart, we can easily see the strong support (broken resistance) line staying at $22, followed by the next key support at $21 where lots of buying pressure has been taking place in the past and investors have shown quite a lot of activity at those levels, which has been leading to further bullish rallies afterwards. As soon as the price reached the $24 resistance there was a lot of profit-taking interest that has immediately led to a short-term correction to the downside to send the price towards the first key support at $22. In fact, the $21-$22 is a key horizontal as well as a diagonal support mark and the price has attempted to break it to the downside in the past few weeks. Yet, no further selling activity has been taking place and traders and investors have been failing to break that level to the downside, giving further indications that the current price is giving an amazing opportunity for buying the XLF and making high profits to the upside. The middle Bollinger band is matching perfectly with the support at $22, while the 38.20% Fibonacci retracement level is staying exactly at that support mark as well, giving further bullish indications.

Chart: Financial Select Sector SPDR Fund (XLF)

Therefore, we will start buying the XLF aggressively at the key support line at $21-$22. Should the price break that strong support mark we will be interested in adding more to our buy positions at the next strong support area at $19.50, which 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 staying at $24 where we will cash in some of our profits, followed by the longer-term target at $28-$30 where we will be fully cash in our profits below the resistance at $31 where lots of take profit interest is expected to take place. We will be then waiting for a correction back to the downside in order to buy again and make further profits on the way up.

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 support 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 at $60.70, just above the key support mark at $60 where lots of buying pressure is expected and the price is likely to continue its strong uptrend after touching that support level. Should the price break the support to the downside we will be looking to buy more at the next key support mark at $56 where a further buying activity is expected to take place and the price is likely to bounce from either of these two levels.

On the way up, we will be looking to close some of our profits at the first take-profit target area staying at $66, followed by the next target at $72-$74 where we will be fully cashing in our profits.

We at Dow Experts believe all those corrections are giving us amazing buying opportunities to benefit from and give us a chance to invest in some of the biggest companies around the world at a huge discount – an opportunity that doesn’t happen very often and when it does we need to be there and fully take advantage of that great long-term bullish potential. So, we have decided to analyze some of the largest companies within these two ETFs (XLI & XLF).

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

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 XLI and XLF that have a big impact on the overall performance of the two ETFs.

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Sincerely,

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