As the market continues its emotional outbursts up and down, Simpler Trading team members are keeping watch on sectors that are showing promise.

These sectors appear to have weathered much of what the economy and stock market have dished out since the pandemic.

Traders can tap into these sectors for potential trades while the market sorts through the ongoing turmoil of the economy, world events, and central bank plans for interest rates.

Financial sector leads stock market, tech falters

One area of the stock market that Simpler’s traders have on the radar is the financial sector.

The team tracks this sector with technical analysis of the Financial Select Sector SPDR Fund (XLF). As interest rates have risen significantly this year, thanks to higher bond yields and benchmark interest rates controlled by the Federal Reserve (Fed), this sector improved despite losses in the overall market.

A key stock to watch in the financial sector is Goldman Sachs Group, Inc. (GS), according to John Carter, Founder of Simpler Trading.

“So goes Goldman Sachs, so goes the market,” John said, noting a long-held adage among traders. “Goldman Sachs is often a leading indicator. We want to keep that in mind.”

Financial sector companies such as Goldman Sachs continue to earn profits thanks to the higher interest rates. Other sectors, such as retail and technology, don’t fare as well with higher interest rates.

Higher interest rates bleed into inflation-driven product pricing for retailers and technology companies and negatively affect the bottom line.

Some companies that reached the trillion-dollar valuation level in the last two years, such as Amazon.com, Inc. (AMZN) have faltered. Amazon has lost $1 trillion in market value since hitting a high of more than $1.8 trillion just 16 months ago. 

Across the technology sector, companies have lost a combined $3 trillion in valuation over the last 12 months.

Large-scale companies with high valuation such as Google parent Alphabet, Inc.(GOOGL) and Apple, Inc. (AAPL) have been hit by higher interest rates and declined in overall valuation. Apple has weathered this economy, retaining much of its market cap valuation, and now rivals Google, Amazon, and Meta combined in valuation.

John is watching a squeeze setting up in Apple as the market digests recent choppy price action. Apple, considered a bellwether stock by Simpler’s traders, has struggled since January and its performance has been choppy in a downtrend. AAPL closed at $148.79 today, down 0.83% today, but rising from $134.87 a week ago.

One stock that John and many other traders favored during the pandemic is Tesla, Inc. (TSLA). John made millions on this stock (and Google) during this time. Tesla has been the poster child of the technology sector and the chart for this stock is “not pretty” right now, John said.

“There is nothing positive about this,” John said. “Tech is a wreck.”

The difficulty for traders in this almost frantic market is looking underneath the chaos and finding the stocks within sectors that continue to present trading opportunities despite high interest rates.

“It’s a tale of two markets,” John said. “Some industries benefit from this environment, and some don’t.”

John doesn’t see the technology sector with a big rebound anytime soon, and that is why he has moved on to the other sectors. He is also keeping an eye on the materials and energy sectors.

Watching hawkish Fed plans for next setup

Weak earnings reports among retail companies and panic across cryptocurrency were disappointing to market participants and the three major indexes closed down on the day.

In the market today, the Nasdaq topped all losses by dropping 1.54% to 11,183.66 points. The Dow was near flat at 33,553.83 points, slipping just 0.12% while dropping 39.09 points on the day. The S&P 500 rounded out the down day, falling by 0.82% to 3,958.80 points.

John doesn’t see recent downside pressure as an immediate harbinger of a market-wide crash.

“I’ll change my tune if the market changes,” John said.

What he is watching is for a shift from hawkish Fed plans to further raise benchmark interest rates.

He credited recent market rallies following cooler than expected U.S. Consumer Price Index (CPI) and U.S. Producer Price Index (PPI) data as a sign that market participants are seeing inflation easing and bond rates lowering. The expectation follows that the Fed will back off its aggressive goals in attacking inflation.

Central bankers have indicated in public venues this week that they would support easing interest rate hikes in December and into next year.

As the stock market digests this swirling of news events, John believes recession fears have waned and at some point the Fed will pause raising rates. Traders can only watch and wait for that pause, and react along with the market.