Judging the State of the Market

Most everyone knows that SPY is an ETF consisting of 500 stocks and is designed to follow the performance of the S&P 500 Stock Index. 

What many people do not know is that there are also 9 sector ETFs that consist of various numbers of stocks and are designed to follow one industry group within the S&P 500. Here is the list:

XLB  Materials

XLE  Energy

XLF  Financial

XLI Industrial

XLK  Technology

XLP  Consumer Staples

XLU  Utilities

XLV  Health Care

XLY  Consumer Discretionary

Every market cycle is different because different sectors lead and lag the overall market. “Industry rotation” is a term frequentlu used to describe this phenomenon.

Rather than wait to hear what the talking heads have to say on TV, you can do your own analysis by following these ETFs. For example, from the March 16, 2011 market low, the XLV and XLP ETFs made continuous new highs without pulling back below any support level until their highs on May 18 and 19, respectively. While hindsight tells us that any trader could have used neutral to bullish strategies (covered calls, credit put spreads, etc.) for two months successfully, it is the technically-oriented trader – who reviews these sector ETFs regularly – who would have spotted these opportunities early.