Buy (Really) Big with the Best-Performing Sector of 2018

What could be better than owning the best individual stocks in the market right now?

How about owning all the best stocks, at once?

Today's pick takes us right to the beating heart of the mighty U.S. economy and gets us a nice slice of that $19 trillion pie.

Here we go...

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Many Will Own It, Few Will Make This Kind of Money on It

Today's "Best in Breed" pick is none other than the gigantic consumer discretionary sector, as tracked by the Consumer Discretionary Select SPDR ETF (NYSE Arca: XLY).

One thing you can say about XLY: It doesn't stray very far from most trading screens, or television screens, for that matter.

With superheavyweights such as Inc. (NASDAQ: AMZN), Netflix Inc. (NASDAQ: NFLX), Walt Disney Co. (NYSE: DIS), McDonald's Corp. (NYSE: MCD) and Starbucks Corp. (NASDAQ: SBUX) among its top 10 holdings, there's no shortage of news on sector components.

And with Amazon and Netflix as members, it's no surprise that XLY is the best performer among the 10 major S&P sectors in 2018.

It's positively blowing away the major market averages as well, as shown in the relative strength chart below of XLY versus the S&P 500. It's also outpacing the high-performing, tech-heavy Nasdaq and small-cap Russell 2000 Index.

XLY’s 50-day moving average

On the charts, XLY's 50-day moving average has been pointing higher since the beginning of June, during which time the exchange-traded fund has advanced about 4%. The last time the 50-day reversed upward was in late October, which started a three-month rally that raked in more than 20% in gains - no small feat for such a massive sector.

MARKETS TANKED but Chris' readers got the chance to score winning 40.42% on CSCO, and 36.92% on SKT, on top of last week's double- and triple-digit wins. Click here...

So, there's plenty of upside potential in the current rally, especially with the pullback of the past few days. Also, XLY appears to be finding some support around the $109 level, the site of the January peak.

xly chart

It looks even better down among the individual stocks in the basket.

See, "Best in Breed" system analytics show that 42% of XLY's components have hit three-month highs within the past week. And 75% of the stocks there are trading above their 50-day moving averages compared to 54% 10 days ago.

Taken together, these stats tell me that XLY has strong momentum that will carry it well beyond its all-time high at $112.62, reached just last week.

One of the key factors in my "Best in Breed" analysis is the component-weighted short interest ratio, which combines individual stock short-interest data into one overall ratio for the sector. The higher the number, the more likely the sector will benefit from a bullish short squeeze.

Now the XLY short interest ratio is quite low. In fact, it's among the lowest of the ETFs I track. While that might appear to be a bearish sign, it is anything but, especially for XLY.

Relatively low short interest on the top-performing sector ETF is to be expected; it's normal. That doesn't make it bearish. All it means is that I can't put it in the "bullish" column in my analysis. But it's hardly a negative that would make me avoid such a strong sector.

I think you're going to like playing XLY as much as I do. Every investor should own this outright, but to make the absolute most possible money here, the just-outside-the-money XLY Sept. 21, 2018 $110 call (XLY180921C00110000) is my preferred option trade.

If the rally lasts three months, as it did starting last October, the September expiration will allow ample time for the entire move. And if the rally matches the previous performance, this option will more than triple in value.

Now, everyone knows about the Amazons and Netflixes of the world. They've been analyzed to death.

But, right now, as you read this, I'm running a "Best in Breed" analysis to nail bullish opportunities beyond the crowded top 10 holdings.

What I'm seeing right now suggests serious "hidden gem" potential, and I'm going to let you in on my findings tomorrow afternoon, right here.

Talk to you then.

Too Many People Missed Out on This

U.S. stocks took a vicious beating on Monday - indices were slammed with the biggest one-day drops for months - double- and triple-digit losses across the board, as the VIX "fear gauge" rocketed 25%. Of course, this much was on the news...

What didn't make headlines were the two urgent alerts Chris Johnson sent to a small group of subscribers that day, with precise instructions for scoring a winning 40.42% on CSCO and 36.92% on SKT. This is in addition to last week's 50.60% and 560.40% on SPRT and 45.45% on NDLS.

If you got those alerts, there's nothing you need to do. You're set. But... if you missed out, you'll want to click here to learn more about how Chris' system works...

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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