Flip the Script: Protection as Your New Offensive Playbook | ChartWatchers

Historic and seasonal efficiency knowledge point out that the Utilities and Shopper Staples sectors might be efficient progress devices, notably in March. Technical evaluation of the present value motion for Utilities Choose Sector SPDR Fund (XLU) and Shopper Staples Choose Sector SPDR Fund (XLP) helps the thesis that these sectors are poised for progress, providing merchants doubtlessly favorable entry factors for capitalizing on this seasonal development.

If the very best protection is a powerful offense, then typically the best offense is a defensive tactic used offensively (as Napoleon did when he used the divisional sq. tactic within the Battle of the Pyramids). It is a matter of correct placement and timing.

The identical might be stated with regards to shifting progress vs. defensive ways in your trades. Particularly, this text focuses on exploiting the Utilities and Shopper Staples sectors as progress devices. It is a matter of timing.

Exploiting Seasonal Development Alternatives Utilizing Defensive Sectors?

This text takes its queue and slight diversion from Tom Bowley’s insightful article, the place he discusses the risk-on and risk-off surroundings, evaluating XLU and XLP with the “ultra-aggressive” Expertise Choose Sector SPDR Fund (XLK), a Tech sector proxy. Bowley makes a compelling and balanced case to think about threat and warning as the present bull market continues to achieve new heights.

This piece takes a little bit of a diversion. This is the argument: From a seasonality perspective, March is XLU’s greatest month for progress and XLP’s second-best month for progress. Briefly, these two defensive performs occur to carry out their most aggressive traits (on a seasonal foundation) within the month of March.

XLU’s 10-12 months Seasonal Efficiency In opposition to the S&P 500

CHART 1. 10-YEAR SEASONALITY CHART OF XLU VS S&P 500. In opposition to the broader market, March is XLU’s strongest month.Chart supply: StockCharts.com. For instructional functions.

On common and over 10 years, the Utilities sector (XLU) has outperformed the S&P 500 with an 89% higher-close price and a 2.9% common return in March. Taking a look at all 12 months, you’ll not discover a better-performing month than March.

XLP’s 10-12 months Seasonal Efficiency In opposition to the S&P 500

CHART 2. 10-YEAR SEASONALITY CHART OF XLP VS S&P 500. March is XLP’s second-strongest efficiency in opposition to the S&P following December.Chart supply: StockCharts.com. For instructional functions.

On common, over 10 years, XLP has outperformed the S&P 500 with a 56% higher-close price and a 1.3% common return in March. The typical higher-close and return charges are strongest in December, however March is XLP’s second-best performing month.

Utilizing “Protected” Performs as a “Daring” Transfer

Much like the analogy talked about above—utilizing a defensive tactic to realize an aggressive end result—may it’s prudent to shift buying and selling focus to a “warning play” to get forward of the broader market? Traditionally and seasonality-wise, this has performed out properly on common within the final 10 years, however whether or not the chances are in your favor this yr actually will depend on the whims of market sentiment and whether or not you could find a smart entry level within the present value surroundings.

In spite of everything, March is only some days away.

XLU’s Worth Motion Now

CHART 3. DAILY CHART OF XLU. The swing chart makes directionality and entry/exit factors clear.Chart supply: StockCharts.com. For instructional functions.

The final two decrease lows in January and February coincided with an increase in shopping for strain, as indicated by the Cash Circulation Index (MFI), which it’s also possible to consider as a volume-weighted RSI. The bullish divergence between declining costs and growing shopping for strain foreshadowed this month’s value rise.

For those who check out the ZigZag strains, you may see the swing factors that outline the development. So, if XLU reverses course and rises to meet its seasonality-based projection, it must break above the 2 swing highs (see inexperienced dotted strains) at $62.25 and $62.62 to interrupt the present downtrend. It might even have to remain above the latest swing low (see pink dotted line) at $59.15.

If you wish to go lengthy XLU, a break above $62.25 on excessive momentum is perhaps a positive entry level.

XLP’s Worth Motion Now

CHART 4. DAILY CHART OF XLP. Simply crusing with no clouds in sight? In any other case, a seemingly boring chart.Chart supply: StockCharts.com. For instructional functions.

Shopper Staples (XLP) seems to be chugging alongside slightly serenely. Trying on the Relative Power Index (RSI), XLP is neither overbought nor oversold. It is simply there within the center. To get a clearer and volume-weighted studying, have a look at the  Cash Circulation Index (MFI), which exhibits just about the identical factor however with a slight upward tilt, indicating a slight rise in shopping for strain.

The chart plots a trendline to indicate the principle development plus a Kumo (Ichimoku Cloud) for secondary context. Based mostly on all of those readings, XLP offers each indication that it is heading greater. So, when you’re trying to go lengthy XLP to benefit from its seasonality-based expectations, getting able close to the trendline, say, $73.50 is perhaps a positive spot. You do not wish to see value fall under the trendline, and an in depth under $72.36, its most up-to-date swing low, would probably invalidate the bullish thesis.

The Backside Line

The strategic exploitation of Utilities (XLU) and Shopper Staples (XLP) sectors for seasonality-based alternatives is an attention-grabbing case wherein you’d use defensive instruments to hunt progress. The timing, as with all trades, is essential, and the approaching month of March, traditionally the strongest for these sectors, affords a singular window for this technique. In fact, seasonality is rarely a positive factor, so when you’re planning on pursuing this chance, be able to exit upon the primary indications that this season may not comply with historic patterns.

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.