Is it a good time to invest in these defensive market sectors?

The time has come again for us at DowExperts to share with you our most recent ETF correlation analysis and overall market observation, in order to help you to prepare for what’s coming in the month of May. The market movements in the past month have been nothing short of spectacular all across the board, as we saw substantial continued gains on all major US indices, marking the strongest month for the US stock market since 1987. The fundamental factors that played a crucial role in last month’s price action were associated with new unprecedented monetary and fiscal stimulus measures by the Federal Reserve and the US government, as well as with some positive developments on the medical front with new improved testing solutions and potential anti-viral treatments for COVID-19.

A lot has happened since the terrifying selloff that we saw back in March, as the overall market sentiment has turned from extremely bearish in March to extremely bullish in April.
Following the new, innovative and proven Dow Theory 2.0 our cross-sector correlation analyses in February and March have helped our followers to not only prepare for the declines in March, but to also rise as phoenixes from the ashes of that mind-blowing market crash. To summarize briefly for our new followers, we at DowExperts spotted a broad market weakness across multiple different charts and time frames on all of the major ETFs and stocks that we were observing back in February, which resulted in us issuing a cautious to bearish outlook for the stock market. The ETF correlation analyses that the DowExperts released then allowed our clients to collect the profits on their long-term buy positions and protect their portfolios from the huge downturn that followed. Then a month later, in our analyses for March we investigated the exceptional volatility and the seemingly relentless downward pressures in the stock market, by again using our innovative and thorough Dow Theory 2.0 investment approach in order to help our followers navigate these unprecedented times. Again our analysis proved to be spot on by confirming that the downtrend had significantly overextended to the downside and that a major rebound was expected in April, which is exactly what happened last month.

By using our investment philosophy and expertise our followers were able to apply a rational analysis for their next steps as investors while everyone else out there was letting their emotions, mainly their panic, govern their investment behavior. Every single one of our Stock-picks for April has reached its respective take profit levels that we laid out in our analyses, thus marking an outstanding appreciation of 25% on average in the last 4 weeks! If you take a second and think about the fact that having a $20-40 subscription with the DowExperts could have generated you a 25% return on your investment (ROI) in less than 4 weeks, you would understand that this is an unprecedented opportunity for you as an investor to benefit from our professional and highly complex market analyses at these substantially discounted starting prices!

And let’s face it, whether you have an investment portfolio of 10,000 EUR, 100,000 EUR or 1,000,00+ EUR, a 25% return in 4 weeks represents a remarkable monetary gain for you as an investor. Don’t worry if you missed those gains last month, because you didn’t know that we are here, as now you do and your financial future is in your own hands. Let us help you fulfill your investment potential!

Now let’s look ahead and see what the Dow Theory 2.0 has in store for us for the month of May and how we could further optimize our investment portfolios moving forward in order to reduce our risk-exposure and maximize our profitability. The proper re-balancing and sector rotation is exceptionally important in such volatile market conditions, as you need to always make sure that your capital is properly allocated. The two sector ETFs that we will be analyzing closely today are the XLU – Utilities Select Sector SPDR Fund and the XLP – Consumer Staples Select Sector SPDR Fund, as we believe that some of the companies comprising these two popular ETFs are uniquely positioned to benefit from the current market environment, which in turn makes their stocks an appealing choice for us.
We will first take a look at the broader economic and fundamental developments in the last month in order to evaluate what is the most likely scenario for the month of May in terms of monetary and fiscal stimulus measures, medical innovations and improvements, and general economic data readings as this will have an important role in determining our overall bias for the weeks ahead. Later, we will investigate the XLU and XLP sector ETFs independently and we will see how they stack up against one another in terms of correlations, confirmations and signals. Last but not least we will recommend 2 stocks in each of the two sectors for our followers to consider taking advantage of in the coming weeks!

Economic Outlook

In times of an unprecedented broad economic shutdown caused by the COVID-19 pandemic, central banks around the world have realized that the risks of a global economic depression are not only real but that they elevate by the day as every day the world stays shut costs billions of dollars of actual realized losses for virtually every sector our there. Thus, the Federal Reserve, which is the largest and most influential central bank in the world decided to adopt an actively supportive “by all means necessary approach” basically announcing their readiness to provide an unlimited financial stimulus for the US economy in order to avoid another depression.

“We are deploying these lending powers to an unprecedented extent [and] … will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” says Jerome H. Powell, Chair of the Federal Reserve Board of Governors.

They have cut rates to virtually zero and rolled out a series of emergency and unorthodox lending facilities designed to backstop markets and keep credit flowing to businesses. The Fed’s balance sheet has already reached $6.57 trillion, which is the largest it has ever been. One of their latest measures was to include $2.3 trillion in lending to support households, employers, financial markets, and state and local governments. Additionally, the Fed has resumed its Quantitative Easing program aimed at purchasing massive amounts of securities, a key tool employed during the Great Recession, when the Fed bought trillions of long-term securities. As a result of the COVID-19 outbreak both the treasury and mortgage-backed securities markets have become completely dysfunctional, and the Fed’s actions aim to restore smooth both investors confidence and market functioning so that credit can continue to flow. The initial commitment by the Federal Reserve was to at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities over “the coming months.” However, the followed historic market declines and broad-based panic caused the Fed to modify its monetary policy, thus making the purchases open-ended. It also expanded purchases to include commercial mortgage-backed securities, which was another unexpected and unprecedented move.

Regardless of the powerful monetary stimulus provided by the Fed, the economy needed a government intervention on the fiscal side as well in order to stay above water in these difficult times and the US government knew that. Thus, it delivered massive liquidity packages throughout the last few weeks including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and a $484 billion Coronavirus relief package aimed at helping Small Businesses survive. The combined and relentless approach on the monetary and fiscal side has substantially increased investors confidence that not only the Fed but also the US government are staying on top of this current crisis and are both ready to do whatever it takes to help businesses and individuals to survive this economic destabilization.

The positivism among investors was clearly displayed in the price action throughout the month of April, as we saw the strongest market gains since 1987. However, as we are entering into May, we at DowExperts see that the combination of the recent bad economic data and the substantial profit taking interest that is present in the market at the moment could be the cause for a much weaker and vulnerable month for the stock market. There have been over 30 million Americans that filed for unemployment benefits in the last 6 weeks which is the highest reading for the country in decades and could further indicate a substantial jump in the unemployment rate in the US of up to 22%. This would be a catastrophic number for the US economy to deal with, as the only time in history when the unemployment rate had spiked to such levels was back in 1930s during the Great Depression. In order for our followers to actually realize what that means, we believe that it is important to point out that the unemployment rate during the 2008 economic crisis jumped to only around 10%, which is more than 2 times lower than what could be seen this time around. Additionally, we saw the weakest quarterly GDP report this April since 2008, showing a 4.8% contraction of the US economy for Q1 and the projections for the second quarter are even worse.

When you take all of that into consideration and recognize that while these terrible and truly horrifying economic numbers were coming out the stock market was actually advancing and experiencing the strongest bull-month since 1987, then you must ask yourself the very logical question “Well, if the economy is doing so poorly, how is it possible for the stock market to rally continuously week after week?”. The answer to this question comes back to the topic of the irrational nature of the current environment where the main drivers are not actual economic data, earnings announcements or future economic projections but rather speculations regarding the potential decline of new COVID-19 infections, available testing options and new anti-viral drugs for fighting COVID-19. As you can imagine, this is not a healthy and sustainable way for the stock market to continue to grow and expand in the future as there are only so many speculations that could be made, and once the actual economic data starts to sink in investors minds, then everyone would realize that they need to focus on the old but gold saying in the market that “you have to be fearful when others are greedy, and you have to be greedy when others are fearful”. Thus, we are issuing once again our cautious and rather bearish sentiment for the coming month, as we believe that even if the market doesn’t revisit its March 23rd lows, it will be definitely trading lower in May than where it was trading at the end of April.

XLU – XLP: Utilities vs. Staples

Following our overall defensive economic outlook for the month we have decided to analyze two of the most defensive sectors in the market – Utilities and Consumer Staples – which we believe are quite uniquely positioned to benefit from the expected economic slowdown in the weeks and months ahead.

In order to explain our fundamental reasoning we would look into couple key facts associated with historical investors’ behavior during recessions or/and depressions and would further investigate the specific characteristics of the current public health related economic shutdown. Additionally, we would also analyze the technical charts of both ETFs using our complex and innovative Dow Theory 2.0 approach in order to evaluate the respective correlation confirmation signals and issue multiple high-conviction recommendations.

Historical & Fundamental view

The famous saying that history tends to repeat itself is true only because history depicts people’s desires, emotions, weaknesses and puts them to the test of time by providing various different problems, crises and situations that need to be resolved. In most cases these problems have the same general origins, but different outfits with respect to the historical time that they occur in. For example, as mentioned in one of our last month’s analyses the current COVID-19 pandemic is not the first public health related crisis that we have seen in recent years. As a matter of fact there have been 11 public health crises that have occurred since 1981, which we have all successfully fought as a civilization.
It seems that this time around though the global hysteria and panic reached new heights, as thanks to the Internet the world is more closely connected now than ever before in history. As you know, any piece of information regardless of whether it’s good or bad can travel around the globe in seconds. The media has the power to turn any situation into a global breaking story in less than a day. Now, we are far from saying that the COVID-19 pandemic is an orchestrated and exaggerated story, because it is definitely not. It is a serious illness that imposes detrimental health effects to a meaningful percentage of those infected with the virus and we are with the families of those who have suffered from this terrible condition. However, we also recognize the fact that the way the modern day world is structured in terms of connectivity and communication has provided the virus with a platform (the Internet) through which it has been able to access the minds, hearts and souls of literally every human being on Earth. We at DowExperts believe that this has actually made the virus much more powerful than it could have become otherwise as today we are seeing billions of people worldwide factoring the existence of COVID-19 in their everyday lives by following rules, precautions and steps to reduce the risks for themselves and their loved ones. Economies are not functioning properly. Millions of companies are shut down globally and are on the verge of bankruptcy. Billions of people are afraid that they might not be able to get through the next few months. This is the reason why we can conclude that while COVID-19 is definitely not the deadliest or most dangerous virus in history it is by far the most powerful virus that the world has ever seen.

Now, after putting some historical context into our analysis we would like to look at the Utilities and Consumer Staples sectors and explain to you from a fundamental standpoint why they will be some of the likely winners of the current market struggles.

The utilities sector refers to a category of companies that provide basic amenities, such as water, sewage services, electricity, dams, and natural gas. As you can understand the more people stay home, work from home etc. the higher the demand for these basic amenities will go, thus the more profitable the companies in this sector will be. In a normally functioning economy a person typically spends around 4-6 hours per day of active behavior at home (not counting sleep). In the current environment most of us spend almost 24 hours at home out of which anywhere between 12-16 hours are considered to include an active behavior. Thus, this roughly increases the volumes for businesses in the Utilities sector 3 to 4 times, which makes their stocks more attractive from a valuation perspective as their revenues and earnings are expected to go up.

At the same time the Consumer Staples sector has always been considered as the recession-proof sector, as it is filled with companies that produce items such as food, beverages and non-durable household and personal products. These are the products that people are unwilling and incapable of giving up on regardless of their financial situation. Consumer staples are considered to be non-cyclical, meaning that they are always in demand, year-round, no matter how well the economy is—or is not—performing. As such, consumer staples are impervious to business cycles and even thought they are characterized by steady or unspectacular growth, the consumer staple sector is a haven for investors in recessionary times. Thus, we usually tend to see substantial capital inflows into this sector during difficult times as investors begin seeking attractive investment opportunities for putting their money to work.

Technical Analysis

As you know, we at DowExperts never approach any market environment and respective investment idea without putting it to the test of our innovative and highly-successful Dow Theory 2.0 system. Apart from the fundamental side of things we also believe that having the right confirmations from the technical chart is a mandatory requirement for completing a thorough professional analysis of any given opportunity.

Following our 10-year cross-sector correlation matrix that we have built for all individual sector ETFs shows that XLU and XLP share a moderately strong 63% positive correlation. However, when we look at their respective technical charts in the last 2-4 weeks these two sector ETFs have almost mimicked each others’ price action, and are now both giving the same signals. Let’s take a closer look.

Firstly, we have the XLU – Utilities Select Sector SPDR Fund.
After experiencing a tremendous decline on large volume at the end of March with the rest of the market, the Utilities sector has been on a corrective tear to the upside in the last 3 weeks. This has lifted the price from the $45 lows up towards the $60 resistance zone. However, there are multiple different overlapping resistances currently lying at around the $60 mark including: the prior horizontal support is now acting as a resistance, the downward sloping 50-day moving average and the 61.8% Fibonacci retracement level. This would suggest that any rally towards the $55-60 will most likely find lots of selling pressure. We can clearly see from the chart that the price was rejected on 3 separate occasions by the above-mentioned resistance in the last 2 weeks, which has resulted in forming a strong “Triple-top” reversal pattern, which is again another confirmation for our short-term bearish outlook for the coming weeks. Furthermore, the RSI has also formed a lower high and has now started to move below the 30 mark, which indicates that further short-term downside could be expected ahead. The first major support for XLU is sitting at the $52 mark, where if we see a break to the downside then the prices will head down to the next major support zone around $48. Our followers should treat these short-term price declines in the Utilities sector as a great buying opportunity to join a sector that will ultimately benefit from the newly established stay-at-home economy.

Let’s see now how the XLU chart compares to the XLP chart as we always want to have a clear confirmation for a certain move across multiple different sectors and charts before issuing our high-conviction analyses. As you know our complex and multi-layered correlation confirmation approach is at the backbone of the newly improved Dow Theory 2.0 and we are always disciplined in using it for all of our analyses, so that you can have a thorough and objective view of the current market environment.

The XLP – Consumer Staples Select Sector SPDR Fund has experienced a very similar price action in the last 4 weeks as the XLU. The ETF has seen a strong rebound from the $48 lows in March, as it has appreciated all the way up to the $60 mark in less than 4 weeks. This in turn represents an outstanding 25% gain in a single month. When comparing the XLU and XLP charts we can see that the Consumer Staples ETF moved higher in a stronger manner on a relative basis as it was able to break above its 50-day moving average as well as the 61.8% Fibonacci retracement level. However, the rally failed at the 200-day moving average and the 78.6% Fibonacci retracement mark where the price was rejected twice in the last 2 weeks. This in turn has resulted in the formation of a strong “Double-top” reversal pattern. The RSI has also formed a lower high and is now in a downtrend moving lower towards the 20-30 area.

The 2 key support levels that we will be looking at for the price to find strong buying pressure are respectively $55 and $52. We anticipate that a large number of the professional money managers out there and all institutional investors will be re-balancing their portfolios and rotating their capital from the higher-growth sectors like Tech, Entertainment, and Consumer Discretionary into this defensive and recession-proof ETF at these levels. This means that the XLP – Consumer Staples ETF might very well be one of the best performing sectors in the coming weeks and months and this is why we want to make sure that our followers have exposure to it.

In summary, we don’t think that the March 23rd lows will be re-visited in May for the XLU and XLP, due to the fact that these two ETFs are uniquely positioned from a fundamental standpoint to attract new investors capital at these low levels and the companies comprising these ETFs are expected to see very little or no real disruption to their business operations regardless of how difficult the economic situation is. In fact, some of the best-in-class companies that currently have a leading market position in these 2 sectors could see higher than expected revenue and earnings growth in the coming weeks and months as a result of their services and products being used much more frequently by the end consumer. We expect this to make their stocks more attractive from a valuation perspective, thus we will be picking 2 stocks from each of these two ETFs for May, which we will include in our Stock-pick rubric.

We at DowExperts believe that the month of May will present the perfect opportunity for our clients to collect some of the tremendous gains that they have accumulated in the last 4 weeks and to wait for better prices to re-enter the market. Additionally, we also want to stress on the importance of re-balancing your portfolio in these difficult times and ensure that your overall equity exposure is positioned in the right market sectors. There is a reason why professional investors are able to achieve higher and more consistent returns than retail traders and investors and the reason is associated with the fact that professionals know when and how to move their capital across the market in different sectors and stocks with respect to the overall stage of the economic cycle that we are in. The DowExperts are here to help you trade and invest like a professional, which requires an active and always willing to improve approach on your side as an investor.

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 SPY and XLY that have a big impact on the overall performance of the two ETFs.

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