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Selling in Tech, Retail Hints at Tomorrow's Edges Today

Sizing up the prospects for XLK and RTH

by 12/13/2011 8:05:10 AM
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If there is one more push higher in stocks between now and the new year, then where are traders most likely to be successful lying in wait for it?

Strength in retail and technology has helped keep exchange-traded funds (ETFs) representing these sectors in bull-market territory for most of 2011. Save for brief stints in the late summer and early fall when ETFs like the Retail Holders Trust (RTH) and the Technology Select Sector SPDR Fund (XLK) traded below their 200-day moving averages, retail and technology have been two of the sectors where traders and active investors have been able to find bargains in a number of widely-traded stocks.

And after Monday's strong sell-off, retail and technology -- based on their most widely traded representative ETFs -- remain potentially among the most attractive sectors. Both sectors continue to trade above their 200-day moving averages, and notably both XLK and RTH managed to finish off their lows. This suggests potentially that buyers that arrived late in the trading day on Monday will be back on Tuesday.

Let's take a closer look at each ETF. Shares of XLK were last in oversold territory near the Thanksgiving holiday, when they finished in oversold territory for an eye-popping five days in a row. In fact, it was the snapback rally from that extremely oversold pullback that propelled XLK to its recent short-term high a week ago.

For its part, the Retail HOLDRS ETF was even more oversold during the Thanksgiving holiday pullback, closing lower for nine days in a row (six in oversold territory). The pullback sent RTH soaring over the following seven out of eight days, gaining nearly 7% and finishing at its highest level since May.

Heading into Tuesday's session, almost any follow-through selling will put RTH and XLK in oversold territory above the 200-day where buyers historically have tended to be most active.

The ETFs in today's report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of TradingMarkets.com

Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.

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