NEW YORK ( TheStreet) -- With the large sell-off in defensive stocks due to fear of U.S. rate hikes, there is a need to find the new outperforming sector going forward. With an improving economy, the Federal Reserve hopes to cut back on stimulus, this will at first have negative side effects but eventually be beneficial to all.
The sector that looks primed to outperform is energy. The pair below is of Energy Select Sector SPDR (XLE) over S&P Equal Weight ETF (RSP). This pair measures the energy sector's relative strength to the broader market and could break out if things go accordingly.
The pair has been in a long downtrend as the global economy has deteriorated and inflation expectations have become nil. The case that this pair will outperform in the short run is a tough call, but if the economic landscape begins picking up worldwide, and GDP follows, energy could be a leading sector.
The next pair is of CurrencyShares Australian Dollar Trust (FXA) over CurrencyShares Japanese Yen Trust (FXY). The Aussie Dollar is a commodity currency that tracks the movements of such assets like oil and copper. China's weakness has weighed heavily on the pair, as are RBA rate cuts and weaker than expected Australian GDP.The BOJ is continuing its monetary efforts and this should soon be reflected again in the price action. The yen should pick up weakness and the Aussie dollar resume strength. An improvement in both oil and copper will help the move as well.
The last pair looks at United States Oil Fund (USO) on a technical basis. The strategy used of looking at patterns in the commodities sector is much needed due to the volatile nature of the asset class itself, and can be quite accurate over time. Oil will shoot higher on stronger economic prospects and potential geopolitical occurrences. The U.S. and Japan are the two economies that show the best prospects for near term improvement. China has had its difficulties, but could very well improve by end of 2013 or beginning of 2014. Increased sentiment surrounding economic data worldwide could lead to a breakout in the chart of oil below and propel both the Aussie dollar and U.S. energy sector higher.