With the S&P 500 moving over the 1,300 level in the past two days, it could be time to start considering the possibility that the index might be on track to take out its 2011 high in the months ahead.
Click to Enlarge The S&P closed at 1,308.04 on Wednesday, which leaves it 4.6% from last year’s high-water market of 1,370.58. To gain a sense of whether this important breakout might occur, investors should turn their attention to three exchange-traded funds: Select Sector Technology SPDR (NYSE:XLK), Consumer Discretionary SPDR (NYSE:XLY) and Financial SPDR (NYSE:XLF).
Click to EnlargeThe SPDR sector ETFs, in addition to offering individual investors a way to diversify, also can be a useful indicator of broader market direction. And on Wednesday, the XLK moved to within 1.9% of its 2011 high. XLY, meanwhile, finished Wednesday just 1.5% below its peak of last year.
If one or both of these ETFs can move out to a new high, it will represent a strong indication that the S&P also is on its way to fresh highs (barring a surprise out of Europe). Both sectors are important bellwethers: Technology represents nearly 22% of the S&P 500 Index, while Consumer Discretionary stocks make up about 10.8%.
In addition to representing almost one-third of the large-cap market, these ETFs each track economically sensitive market segments. As such, a breakout would be a positive leading indicator for the economy and the market as a whole.
Although XLK and XLY are nearing their breakout points, this is a story that still might require some time to play out. Both ETFs are near the upper end of their respective Bollinger bands, and both have RSIs at levels that have preceded selloffs in the recent past. As a result, we might need to see a pullback before these ETFs can sustain a move into new high ground.
Click to Enlarge However, one ETF that might provide a more proximate signal of market direction is the XLF. At a time in which all of the SPDR sector ETFs have moved above their 200-day moving averages, XLF has touched this key level in three of the past four trading days. If it can move above this resistance in the days and weeks ahead, it would be another positive indicator for market direction in 2012.
Recall that XLF was the first ETF to fall below its 200-day moving average in late May 2011. The broader market didn’t follow for a full two months after XLF, but investors who took note of the ETF’s breakdown had ample warning that a larger selloff was on the way. Now, XLF is on the cusp of surmounting its 200-day for the first time in nearly eight months.
Among the ETF’s largest components, Wells Fargo (NYSE:WFC) and Berkshire Hathaway (NYSE:BRK.B) have moved above their 200-days, while JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Bank of America (NYSE:BAC) still have some distance to go.
No indicator is perfect as long as stocks remain vulnerable to developments in Europe, but consider these ETFs as a prime indicator of broader market direction in the coming months.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
