Carnage: 5 Sector ETFs to Avoid Like The Plague
By now, it's probably safe to assume to that most investors know the SPDR S&P 500 (NYSE: SPY) is trading at its lowest levels since early March. Using the sector SPDRs funds as examples, "outperformance" on Tuesday really means "less bad" in the form of the Utilities Select Sector SPDR (NYSE: XLU) and the Consumer Staples Select Sector SPDR (NYSE: XLP).
Even those low beta sectors are providing little shelter from the storm as XLU is down more than a quarter of percent and XLP is off 0.4% and has violated the $34 level. The message from weakness, however slight, among low beta fare is that things are significantly worse the higher up the risk totem pole an investor chooses to go.
The result? A plethora of sector ETFs should not be sporting scarlet letters and should be avoided by investors in the near-term. Whether it's broken technicals, flawed fundamentals or both, the recipe for success with the following funds is get out of the way or get short.
Global X Copper Miners ETF (NYSE: COPX) The scenario here is rather simple. China is trying to engineer a soft landing. Whether or not the world's second-largest economy is successful in that endeavor remains to be seen. What the world knows is regardless of whether China is intentionally trying to cool its own growth that scenario means demand for copper will for wane.
Since China is the world's largest copper consumer, a slowing Chinese economy is bad for copper futures and bad for copper miners. Freeport-McMoRan (NYSE: FCX) is a prime example. The stock is down more than 20% from its February peak. Freeport may only be 4.9% of COPX's weight, but as the bellwether copper stock, it tells us copper miners should be avoided for now. COPX's chart says the same thing. Following a violation of support around $13.50, the ETF looks like it could retest its October 2011 lows.
SPDR S&P Bank ETF (NYSE: KBE) As we noted earlier, bank stocks were leaders earlier this year but that trend has reversed course in recent weeks. KBE is not being picked on here, though the chart shows significant vulnerability. The Financial Select Sector SPDR (NYSE: XLF) or any other comparable financial services ETF could replaced KBE as a sector fund to avoid at the moment.
Market Vectors Steel ETF (NYSE: SLX) As a cyclical play, the Market Vectors Steel ETF is in hot water right now. SLX is almost 10% below its 50-day moving average and nearly 8% below its 200-day line. The latter scenario could keep plenty of investors away from SLX and its constituents because of the argument that any security that's below its 200-day line is in a bear market.
SLX was sporting a nice year-to-date gain as recently as early March. Now all the ETF needs to do is fall another 3.5% and it will be in the red on the year. It would take a decline of another 23% for SLX to retest its 52-week low, something we don't view as likely, but down is the path of least resistance for this ETF over the near-term.
Market Vectors Coal ETF (NYSE: KOL) A month ago, we said KOL was destined to retest its 52-week low of $27.42. As of this writing, the downtrodden ETF is trading below $29.25. Despite some compelling valuations and M&A speculation pertaining to its holdings, KOL has been hamstrung by depressed natural gas prices and is signaling it's more value trap than value play.
SPDR S&P Retail ETF (NYSE: XRT) Consumer discretionary and retail names have been upside leaders this year and many of these stocks and ETFs at least made strong efforts to hold their gains in recent weeks. Macroeconomic headwinds, be they of the European or U.S. variety, have proven to be too much for XRT and rival funds to overcome. Today's strong volume decline has taken XRT below what once looked like firm support at $60. The order of the day for XRT: No long positions. Short it or buy put options or just leave it alone.
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