Sector Detector: Long XLP/XLU and Short XLB/IYZ

by Scott Martindale, Senior Managing Director

Scott Martindale

This is my first Sector Detector column.   In each weekly post, I will be using the new SectorCast ranking model, which was just released by Sabrient Systems. It’s still based on Sabrient’s fundamentals-based quantitative models, but it will be much more dynamic with a 1-month forward look--rather than the 3-months of our prior scoring system.

Also, I will broaden the scope a bit by tracking the top two Sector ETFs long and bottom two short, rather than just one on each side. And on occasion, I might even toss in some stock ideas from within those sectors.

As for performance tracking, I’ll track the given set of ETFs as a mini-portfolio each week over the course of four weeks. Because the SectorCast model does not include any technical triggers, this will give the fundamentals-based model a chance to achieve its predicted move.

This week’s rankings: This week, the SectorCast model indicates that Consumer Staples (XLP) has the highest score of 87, followed by Utilities (XLU) at 76. Top-ranked stocks within these sectors include Kroger (NYSE: KR), ConAgra (NYSE: CAG), Pepco Holdings (NYSE: POM), and Ameren (NYSE: AEE).

Lurking at the bottom are Telecom (IYZ) with a low score of 12 and Materials (XLB) at 42. Low-ranked stocks within these sectors include Dow Chemical (NYSE: DOW), Vulcan Materials (NYSE: VMC), American Tower (NYSE: AMT), and Crown Castle (NYSE: CCI).

These scores represent the view that Consumer Staples and Utilities stocks may be    undervalued, while Materials and Telecommunications stocks may be overvalued.

Sector Detector has shown how you can use this information in three ways to identify ETFs that have the potential to enhance your upside, downside, or market-neutral trading ideas. First, if you are bullish on the broad market, you can go long the SPDR Trust exchange-traded fund (SPY), which tracks the S&P 500 Index, and enhance it with long positions in SectorCast’s top-ranked sector ETFs. Conversely, if you are bearish and short (or buy puts on) the SPY, you could also consider shorting the two lowest-ranked sector ETFs to enhance your short bias.

However, if you really don't want to bet on which way the market is going, you could try a market-neutral, long/short trade--that is, go long the top-ranked ETFs and short the lowest-ranked ETFs.

And here’s one more idea: You can trade some of the highest and lowest ranked stocks from within those top and bottom-ranked ETFs to further juice performance.

Check back next week to find out how the long XLP/XLU and short XLB/IYZ portfolio is doing, and what changes might be indicated by the SectorCast model.