ETF Watchlist for May 14, 2014

The Dow and S&P 500 indexes climbed to new highs in the past week and this has tipped the balance in favor of the bulls.  It is now up to the Nasdaq and the Russell 2000 to follow this trend. The NASDAQ appears to be forming a short-term bottom here and looks ready to turn higher over the next week, which is a positive sign.





SPDR Financials (XLF)

Recently, we have looked at financials, the second largest sector in the S&P 500 Index. As the chart below shows, financials are climbing back above their 50-day moving average, a good sign for the overall market as it is the second largest sector.


SPDR Technology (XLK)

The largest and most important sector in the S&P 500 is technology, and it followed the broader indexes to a new high this week. This is also very positive for the Nasdaq, although beaten down subsectors such as Internet and social media stocks haven’t broken their downtrends. Biotechnology also remains weak, though it did show indication of improvement over the past week.



iShares Transportation Average (IYT)

A very bullish sign over the past week was transportation moving higher at the same time as industrials. Although the market was already in a primary bull trend, new highs on these two indexes signal that the bulls are seeing opportunities. Importantly, the breakout in the transportation index is very strong and broad: airlines and railroads both made new highs along with the index.



SPDR Utilities (XLU)

Utilities have underperformed this month. The simplest explanation is that investors are rotating out of one of the most defensive sectors. However, there’s still a case to be made that utilities are headed for a period of outperformance relative to the S&P 500 Index, given the length of the bull market and utilities consistent underperformance until the start of 2014. Relative to the S&P 500 Index, utilities are still in an uptrend but if they continue their relative underperformance, the uptrend could soon be in jeopardy.


Market Vectors Coal (KOL)
Global X Copper Miners (COPX)

Besides energy, materials stocks have done well in 2014 and they have been coming on stronger of late. Earlier this year, we were genuinely worried about the economic slowdown in China. Copper prices in particular broke below a major long-term support level and there was risk of an accelerating decline. While the economic data out of China remains negative, the markets are disagreeing with the reports and sending commodity prices higher, along with resource equities. Since markets tend to move ahead of the news, this is a good sign. These ETFs still have further to go before they establish a clear bullish pattern but they look much better today than they did two months ago.

KOL is one ETF to follow this week. On Monday, many coal stocks gained 10 percent on Mainland China’s exchanges (stocks are limited to moving 10 percent in one day). Shares of Chinese companies listed in Hong Kong and the U.S. also bounced on the news. A pullback appears likely, but this could be the start of a larger bullish move.

The coal sector has done terribly over the past few years in China. Now, due to China’s growing problem of bad debt, even a major state-owned coal mine has lost its access to bank credit. Instead of sensing doom though, investors bid up shares in the sector as it appears the Chinese government will allow the market to reshape the industry. KOL has 22 percent exposure to Chinese coal producers.



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