Impressive financial performance by the leading companies out there. What to expect from their share prices in the near future?

The investor sentiment has kept on increasing and market participants have been more positive about the future direction on the stock market as the situation around the COVID-19 pandemic improves. Moreover, the vaccination process has been enhanced by a few different vaccines that have been produced and that was another important factor that boosted investors’ expectations for the future and gave hope that the economy would slowly but surely go back to normal levels, which would of course boost the companies’ financial and share price performance in the future.

In fact, expectations drive the market and once the above mentioned factors took place, investors increased their buying activity on the stock market and that led to a massive bullish reaction all across the board. Thus, we have seen many companies double and triple their share prices in the past 14-15 months since the correction that took place between February and March of 2020.

The situation with the virus is indeed getting better and that is expected to further boost the leading companies’ share prices in the future. Moreover, the Federal Reserve has recently said that they are not ready to start raising interest rates and would prefer to wait until inflation stays steadily at around 2% before they take an action. That had a further bullish impact on the stock market because when interest rates are low that enhances borrowing and financing new projects and operations, which in turn injects more money in the economy, more employment and of course higher share prices.

Today’s analysis will focus on the 10-year positive correlation between the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Technology Select Sector SPDR Fund (XLK), which stands at 85%.

We would also be looking at some of the biggest companies within the two ETFs and evaluate their recent performance, which would give us a chance to come up with some potential investment ideas and be able to maximize our followers’ profitability in the current market environment.

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 Consumer Discretionary Select Sector SPDR Fund (XLY) is concentrated mostly on investing in the biggest companies within the consumer discretionary sector.  The XLY delivers a cheap and very liquid exposure to the biggest names within the sector, excluding small and mid-cap companies. In fact, the XLY invests in companies, such as Amazon, Home Depot, Mcdonald’s, Nike, Starbucks, General Motors and others.

The XLY has got $20 billion in assets under management (AUM) and an average daily trading volume of $628 million.

In fact, the largest companies in the XLY have been reporting very strong financial results in the past quarters. The Q1 financial results for most of those companies have come out better than analysts had expected and that is one of the main reasons for the strong share price performance in the past few months as well.

Technical analysis – XLY

The daily chart of the XLY shows the strong bullish rally that the price has been following. In fact, the XLY has gone up from $81 to $180 (122%) since the correction on the stock market that ended in March last year. The price has faced lots of taking profit interest at the $180 highs and formed a double top at that figure, giving short-term selling indications. That motivated traders to collect some profits, which led to a correction towards the current levels at $171. Yet, the daily chart clearly shows the strong support at $170 that the price is about to test now. Even if it breaks the first support at that mark, it would be heading towards the next support at $162 where more buying pressure is likely to take place and the price is expected to bounce back up from one of those key support levels.

The diagonal support line matches with the diagonal support at $170, giving further bullish indications. Moreover, the RSI is heading closer to the oversold territory and is expected to start giving further bullish indications soon, while the lower Bollinger band matches with the major support at $170, which is seen as another buying signal.

Overall, we believe the recent correction is giving us a great entry level that would allow us to benefit from the strong uptrend that has been formed on the price and make high profits to the upside.

In order to decide whether buying the XLY 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 XLK for a further confirmation for our bullish stance on the XLF.

The XLK tracks an index of S&P 500 technology stocks, including all of the big names associated with the technology sector in the US, such as Apple, Microsoft, Visa, Intel, Mastercard, Cisco, Nvidia, Paypal & others. In fact, the XLK has been among the best performing ETFs in the past decade overall, following the great innovation that we have seen among those leading companies within the sector. They have kept on coming up with new products and services and have practically been leaders in the sector they operate. That of course in turn has been extremely bullish for their share price performance that has been therefore been boosting the XLK, helping it perform so well in the meantime as well.

Technical analysis – XLK

By looking at the daily chart of the XLK, we could see the strong bullish rally that has taken place from the 23rd of March 2020 when XLK bounced from the $68 lows to reach the $143 highs in April this year. In other words, the XLK has doubled in value in just over a year, thanks to the strong financial performance of the leading companies within the leading ETF.

As we have mentioned in many other analyses in the past months, the technology stocks were leading the market significantly during the pandemic and we have seen many of them more than double in value since the COVID-19 correction.

After the massive rally to the upside the price faced lots of take-profit interest at the $143 resistance and formed a double top figure at that point, giving selling indications to follow up on. Since then, the price has been in a corrective mode and dropped towards the strong support at $131 where lots of buying pressure took place and the price formed a double bottom bullish figure at the support, motivating lots of traders and investors to start buying aggressively at that level, leading to another bullish reaction towards the current levels at $137. The $131 horizontal support matches perfectly with the diagonal support at that point, while the lower Bollinger band is right at that level as well, giving further bullish indications. In fact, the price is right between the support and the resistance at the moment so we would prefer to wait for a bit of a correction to the downside that would send the XLK closer to the support at $131 before opening our buy positions. Overall, we remain very bullish on the XLK and the technology stocks in general and believe the recent correction is giving us a great entry level for our buy positions.

Chart: XLK

We would wait for a bit of a profit-taking correction and start buying at around $133, just above the support at $131. Should the price drop lower, we would be interested in adding more to our buy positions at around the $127 mark, just above the $125 support in order to get a better average price on our long positions. Our initial profit-taking target is set at $142-$144, followed by the next target at $160-$170 where we would be fully cashing in our profits.

Overall, the recent performance of the XLK further confirms our bullish stance on the XLY and we would like to add it to our portfolio and benefit from the decent upside potential that it offers.

Chart: XLY

We would start buying at the first support at $170. Should the price drop further in the short-term we would be looking to add more to our buy positions at the next strong support at $162 where more buying pressure is likely to take place. Our first take-profit target is set at $177-$179, followed by the next target at $192-$196 where we would be fully cashing in our profits.

In order to further assist our followers in boosting their investment results, we have analyzed the performance of some of the biggest companies within the XLY and XLK that have a big impact on the overall performance of the two ETFs.

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


This image has an empty alt attribute; its file name is logo.svg

Add a comment