I love music, and I love exchange-traded funds (ETFs). Both allow us to hear the “music of the markets” play out in real time.
In the third and final installment of our series, ETFs & the Music of the Markets, we look at the tune being played in two sectors leading the market rally… semiconductor ETFs and large-cap internet ETFs. Since the election, one of the key drivers of this market rally has been momentum.
In the market version of Newton’s first law of motion, a market in motion to the upside tends to stay in motion… that is, until the market leadership falters. Given this market law of motion, it behooves us to listen to the music of the markets by listening to the action in top-performing market sector ETFs.
Two of the best performers over the past eight months are semiconductor stocks and large-cap internet stocks. The ETFs pegged to these respective spaces are the iShares PHLX Semiconductor (SOXX) and the First Trust Dow Jones Internet ETF (FDN).
A big part of my job as your Weekly ETF Report and Successful ETF Investing editor is to look at sector trading every single day, because every significant market rally is driven by a few leadership sectors capturing the bulk of the “smart money.”
Yet when these leadership sectors falter, that usually implies an impending loss of momentum… and a potentially sharp pullback in the wider markets.
Since late 2016, semiconductors have been the biggest leadership sector in the markets. They rallied big during the fourth quarter 2016, and they are up big so far in 2017 (SOXX up 19.8%).
And while other sector leadership shifted from late 2016 and early 2017 (small caps to utilities and consumer staples) semiconductors have continued to ring out the bullish notes.
As for large-cap internet stocks, it’s no surprise that nearly half of the 2017 S&P 500 rally can be attributed to just a handful of stocks: AAPL, AMZN, MSFT, FB and GOOGL. And, it’s not a coincidence that those stocks are heavily weighted in the super-cap Internet ETF FDN.