With the market moving sideways (volatile, but sideways), I’m starting to see some stocks and sectors holding up on a relative basis. There’s a couple of ways to play this. First, you could simply avoid the weak areas and go into the strong areas. Or, you could do a pairs trade. For example, this month XLP (the consumer staples ETF) is down about 3%. But, during this month, consumer discretionary through the XLY ETF is down about 20%. So, shorting the weak and going long the strong could have netted about 17%. Now, I’d rather do this trade on the other side meaning when everyone is a little more confident and we’ve had a rally. The reason why is because the weakest areas can rally the hardest sometimes so we could see financials, materials, & consumer discretionary rally hard when we get the next rally. Also, there is some relative strength with energy vs. financials.
I think we are setting up for a rally and after it’s run its course, look out for these types of trades to work.
