Watching what exchange traded funds (ETFs) are doing can give you a broad idea of what a particular sector of the market, and thus the strongest companies within that sector, are currently doing. It can also illuminate some information about what particular commodities are doing, or even what a broader index, like the S&P 500, is doing. When you use a two way system of profits, such as what binary options afford, you can look at this data from two different perspectives: which sector ETFs are higher than they should be and are set to come down? Which sector ETFs are undervalued, and are likely to go up in price? Looking at these two different questions can help you to formulate a series of trades that has a longer term perspective, and can help you to get a better overall outlook on your strategy before committing short term trades.
A quick look at sector ETFs of the S&P reveals a few interesting pieces of information. First, the energy sector, as illustrated by the XLE ETF, is way down. On the year, it has shown a -15.3 percent return. It also has a really high price to earnings ratio: 32.4. P/E on its own means very little, but in the little of negative returns, it can be an indicator that there is even more trouble ahead. Typically, for every $1 in earnings, the price of a company (or ETF, in this instance), shouldn’t be higher than 25 if there is short term stability in the market. There is very little stability in the energy sector right now thanks to the falling price of crude oil, and experts are not very optimistic about this sector righting itself anytime soon. That gives a new meaning to the high P/E number and it’s not a very good one at that. This decline in price has been led by small companies like TerraForm Power that have been accused of fraud, but there are other problems, too. At the beginning of the year, giant oil company Exxon Mobil had a price of over $92 per share. Now, it’s trading at less than $79 per share. There’s no failproof way of predicting the future, but it’s pretty clear that the future of the energy sector, at least over the coming weeks, is not very pretty. This is a good place to start with your trading of these companies and should indicate a short or put option position as the general rule to be focused on.
Other sectors are not quite as dismal. For starters, look at the Consumer Discretionary sector (XLY). The 12 month return here is up at 14.5 percent and the P/E ratio stands at 19.5. These are very healthy numbers. The P/E is up higher than some would like, but it’s still within a healthy range. The earnings number far outranks what any of the major U.S. based indices have seen this year, too. This should point to continued growth and a long position. However, there’s bound to be some cutbacks in discretionary spending in the near future, although this cutback should be short lived. But with the holiday season here, the next few weeks point to continued rising stock prices, especially within this proven sector. For major companies like Amazon, this is the best time of the year and a series of short term trades, especially binary options of the call variety, should prove to be successful with good technical timing.
Again, this is just one way of trying to get the pulse for a sector or companies within that sector. It’s not a guaranteed long term money maker, but over the short term, it is valuable reference material for framing each of your trades.