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Argus Technical Analysis – Know Your ETFs!

Joanna Kong
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Argus Technical Analysis – Know Your ETFs!

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There is an old and very important saying for ETF investors: know what you're buying. With crude oil (WTI and Brent) up about 13% on Monday, one might expect huge gains in oil stocks. The largest Energy ETF (XLE) was up only 3.4%. On the other hand, oil-sensitive ETF's like XOP and OIH were up 9% and 11%, respectively. Why?

Two stocks, XOM and CVX, make up 44% of XLE and are vastly diversified in energy markets. XOM was up only 1.5% while CVX was up only 2.5% on Monday. These two companies are just not correlated with oil prices. In addition, XLE is 55% oil and gas refining and marketing, a sub industry that does not follow oil prices.

On the other hand, XOP is made up of many small companies and oil and gas exploration is 69% of the ETF. OIH is 76% oil-related services, but is more top-heavy than XOP. Both these ETF's are highly correlated with oil prices.

At the end of August, Technology (XLK) was the most-important weighting for the S&P 500 with a 22% weight. Like XLE, XLK is top heavy -- with MSFT and AAPL making up 36% of the ETF. The top-five XLK stocks make up 51% of the XLK and the top 10 make up 64%.

Wall Street analysts say the oddest things! There was a recent report that small-cap ETF (IWM) would benefit from rotation/strength in Energy and Consumer Staples. Sound right? NO! Energy stocks make up 3.4% and Staples make up 3% of the weighting in the IWM. That means if these two sectors rise 100%, all else being equal, IWM would rise...6%. Know what you're buying!

Applied Materials Inc. (AMAT)

Applied Materials produces semiconductor fabrication equipment, including products used in deposition, etching, ion implantation, metrology, wafer inspection and mask-making. The stock appears attractive based on valuation, as well as on prospects for long-term top-line growth and margin expansion.

AMAT broke out of a bullish cup formation in early July on above-average volume. The stock then worked higher into late July, and has paused since in what could be another bullish cup pattern. Based on the size of the cup, a breakout above $52.42 would complete the formation leading to a potential measured move up toward the high-$50's/low-$60 region. According to Investors.com, AMAT has a very high Group Relative Strength rating (RS) and high Composite, RS, and Accumulation/Distribution ratings.

Chart support and the 50-day sit near $48 and we would put a stop-loss just below that area. We would take profits in the high-$50's/low-$60 region once the above-discussed $52.42 level is addressed.

NVIDIA Corp. (NVDA)

NVIDIA is a visual computing company. It operates through two segments, GPU and Tegra. GPU produces processors for gaming (GeForce), design professional (Quadro), big data and deep learning (Tesla), and cloud-based streaming (GRID). The Tegra segment produces SoCs, DRIVE automotive computers, and SHIELD settop boxes.

NVDA completed a bullish ABC formation with a large gap opening on August 16. The gap higher occurred on huge volume, a bullish sign, and occurred following above-consensus quarterly EPS results. In late August, the shares traced out a bullish flag and, in the process, back-tested the 50- and 200-day averages. NVDA broke higher out of the flag, recently peaking on September 12. It appears the shares are flagging again. According to Investors.com, NVDA has a very high Group Relative Strength rating, and a high Accumulation/Distribution rating.

We would put a stop-loss just below the 50-day average at $167. We would take profits in the $200 region.

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