I’ve really enjoyed focusing on ETFs in the newsletter because many times they can be misunderstood by traders, and they can actually provide an alternative (and cheaper) way to trade if you’re wanting to expand your trading profile.
With that being said, Gang…
Let’s talk about why I’m looking at the XLF ETF…
The recovery that we’ve seen through 2020 has mostly been in tech. A lot of the work from home stocks are in the tech sector. We’ve seen a lot of strength in things like transport. So when the money has been moving to different sectors, XLF and XLE simply weren’t invited to the party.
Now they’re moving higher.
The Double Green Market:
XLF is what’s known as a double green market. For me, that’s just code for the way in which the 8 period, 13 period, 21 period, and 34 period exponential moving averages are structured and moving higher signaling that there’s a path of least resistance to the upside. You’ve probably heard me mention this before on one or two occasions. Double green markets are a fantastic way to identify a strong sector.
What that really comes down to though is that the probability of the XLF going to higher highs is greater. That makes for a good trade, Gang.
XLF’s Sector Rotation And Stocks Within:
The sector rotation that we’re seeing into the XLF right now is creating a double green uptrend. Now we need to take the next step into the XLF. What are the stocks within the XLF ETF? We’re looking for stocks that are tracking with the broader average.
This is the boats and tide (remember that analogy?).
Not all stocks within the XLF are going to participate or even move like the broader sector. Yes, a high tide can lift all boats, but if the boat has a hole in it, it’s not going to lift with the tide. Some companies and stocks just aren’t that healthy. So when the broader sector is moving higher, they’re not going to benefit to quite the same degree.
Most of the heavier weighted stocks within the XLF: JP Morgan, Bank of America, Citi, BlackRock, Morgan Stanley, American Express, and Schwab are moving higher with the XLF however. When I look at a sector where most of the stocks are moving higher with the tide, I prefer to play the ETF rather than trying to pick an individual winner/stock.
However, if I did want to pick individual winners, I’d look for the heavier weighted stocks within the XLF that are also double green. This way I know they’re benefiting from the rising tide. Examples of the stocks that are benefiting from this momentum?
Names like Schwab and BlackRock.
They’ve been very consistent over time in the XLF, and in some ways, BlackRock and Schwab have even been stronger than the XLF. Meaning they turned into uptrends before the broader sector did.
That brings me to my last point which is…sometimes before the broader sector shows organization and strength with those mentioned exponential moving averages, individual stocks oftentimes will precede that, and those are your true relative outperformers.
So that’s why we’re looking at the XLF ETF along with Schwab and BlackRock. The sector rotation suggests we want to be long the XLF. This type of scanning is unconventional but it works.
Understanding Outperforming Stocks:
When we understand what the outperforming stocks are, we can begin to build our watch list. The setups that we can build as traders to achieve great trading starts with a watch list. It doesn’t start with endless strategies. It doesn’t start with endless indicators. It starts with a solid watch list.
When you have a solid watch list, you’re picking from the best of breed within that sector or within that index. The margin for error and the probability that the market’s going to continue in the direction that you expect will be higher when you do this. Who wouldn’t want that kind of probability, that kind of wind in your sails, especially when you’re playing trends.