In our weekly sector technical analysis, ETF Stocks uncovered three sectors with clear buy signals and birds of a feather sector underperformance candidates.
Financials, Computer Services, and Real Estate are the triplets that appear headed for outperformance; while Biotech and Pharmaceutical are showing signs of weakness. Make sure you head to ETF Stocks on Tuesday to get the full sector performance scorecard.
As we mentioned in our market review, Wall Street is headed for a conflict between the technical state of the market and forecasted earnings. Maybe low expectations on the profit front turns out to be a case of setting low expectations and bad looks good. If not, the proverbial stuff is likely to hit the fan. The unanswered part is when.
Our trade this week should fare well no matter what stocks do, provided we correct in our assessment of hot and cold sectors.
We will focus on a ZERO Trade, or a form of “pair trading” as hedgies call it.
Since we identified financials as a potential out-performer, the idea is to add iShares Dow Jones U.S. Financials (IYF) and sell short an equal amount of Market Vectors Pharmaceutical ETF (PPH).
In practice, let’s say you invest $10,000 in IYF, your account will be debited 10K. By shorting an equal amount of PPH, a $10,000 credit gets put right back in – a ZERO trade. Now, as long as Financials outperform Pharmaceuticals, minus fees, investors in this strategy will profit no matter which direction the overall market takes.
This is an immensely popular trading technique in the hedge fund world when the “gurus” are uncertain on what’s next.