Sunday, August 26, 2012

Sector & Group Rotation Notes - 8/26/12


Listed below are notes from the author's weekly analysis. The blog will not publish Labor Day weekend, but should return Sunday, September 9th.

The Sector Trends blog does not make forecasts and does not cheerlead with its commentary. The perspective offered is on current trends in the market, which sectors and groups are rotating, and which stocks from these groups are likely to perform best in a neutral/positive environment. Readers need to provide their own assessment of market health, employ their own risk management strategies, and trade accordingly. In a declining market nearly all equities will suffer, including those found listed here. 

All data and most of the charts displayed here are the property of MarketSmith, and are published here with their permission. Clicking once on a chart enlarges it for enhanced readability.

Market Overview:
The table below shows price performance for key markets and sectors over the trailing 26 weeks, and is sorted high to low by 5 week performance. The green and red shading denotes relative performance +/- to the SP 500 for the time period in question.

Industry Group
1 Week Gain
2 Week Gain
3 Week Gain
5 Week Gain
13 Week Gain
26 Week Gain
Philadelphia Gold/Silver Index
5.3%
6.4%
12.1%
14.2%
6.8%
-15.8%
Philadelphia Semiconductor Index
-1.5%
-1.7%
2.3%
9.3%
7.2%
-5.9%
KBW Large Cap Bank Index
-0.1%
1.2%
2.4%
5.1%
7.0%
5.5%
Nasdaq Composite
-0.2%
1.6%
3.4%
4.9%
8.2%
3.6%
Philadelphia Housing Index
0.8%
5.4%
8.7%
4.8%
15.7%
22.1%
Russell 1000 Energy Index
-0.8%
-0.9%
1.6%
4.8%
9.6%
-5.8%
Pboe Oil Service Index
-1.4%
-1.0%
2.2%
4.7%
8.9%
-12.8%
SP 500
-0.5%
0.4%
1.4%
3.6%
7.1%
3.3%
FXE euro
1.4%
1.8%
1.1%
2.8%
-0.1%
-7.2%
DJIA
-0.9%
-0.4%
0.5%
2.6%
5.6%
1.3%
Russell 2000
-1.3%
1.0%
2.6%
2.2%
5.6%
-2.1%
Dow Jones Transportation Index
-1.5%
1.1%
0.6%
0.9%
0.8%
-0.4%
Philadelphia Utility Index
-1.4%
-3.0%
-4.0%
-3.8%
1.6%
3.5%


Last week the broad based equity indexes retreated marginally with losses ranging from -0.2% on the Nasdaq to -1.3% on the Russell 2000. Both the Nasdaq and SP 500 are approaching highs from early April of this year and could be expected see some resistance in this area. The fact that the Nasdaq was the strongest of the indexes and volume was well below average for all of the indexes suggests we are seeing normal price action and the market environment remains healthy.  



Falling Spanish and Italian bond yields, combined with recent strength in the euro suggests market fears of eurozone dissolution are, at least for the moment, receding.

Gold broke out of a descending triangle pattern and volatility squeeze this week, an event covered in greater detail below.

Larger Group Themes:
The tables below show commodity, technology and defensively related group's price performance over the trailing 1, 2, 3, 5, 13 and 26 week periods.

33 Commodity Oriented  Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
3
2
6
5
7
1
# in the bottom 50 groups (out of 197)
13
12
5
5
9
16

28 Technology Oriented  Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
6
7
13
14
8
3
# in the bottom 50 groups (out of 197)
7
7
4
6
7
7

30 Defensively Oriented  Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
16
12
6
5
9
14
# in the bottom 50 groups (out of 197)
7
8
12
13
7
4

Commodity oriented groups were hit hard last week, the 13 groups in the bottom 50 for the week averaged a 2.9% decline and were spread over a variety of sectors. This marks two consecutive weeks of softness, and represents an acceleration of last week's weakness.

Technology groups held up reasonably well, with groups spread fairly evenly across the performance spectrum.

Defensively oriented groups outperformed with 16 in the top 50 and only 7 in the bottom 50. However, a closer look at the data suggests this action may not be as ominous as it seems. Out of these 16 groups 6 were food related, and 9 were health related. Most of the food related groups sold off hard June - July due to drought concerns, and their charts suggest the performance of the past few weeks is a bounce from oversold conditions. Health related groups, while sometimes functioning as a defensive strategy, can also serve as growth related investments. Another factor helping to mitigate concern is that utility and alcohol/tobacco groups continued to perform poorly; the Philadelphia Utility Index fell for the fourth consecutive week, losing 1.4%.

In general, the performance in these three areas supports the view of a market pausing.

Group Performance:
Apparel related groups continue to perform well, both the Apparel-Shoes & Rel Mfg group (#103) and the Apparel-Clothing Mfg group (#67) rank in the top 50 groups on the 5 week price performance list, and the top 32 on the two week price performance list.

  • Ralph Lauren (RL) broke through its 200 DMA  Friday 8/17, retested the line on Thursday, and bounced 2% higher off the line this past Friday. While not likely to be the strongest selection from the group, RL does look like it could see $180.
  • PVH Corp. (PVH) has an 89.31 pivot out of a cup & handle base. PVH has seen steady increases in institutional sponsorship over the trailing 7 quarters, with the total number of funds increasing from 527 to 770. 

Last week's notes pointed out promising price action in auto related groups. These groups sold off last week with 4 of 5 finishing in the bottom 50 with an average weekly decline of 3.6%. However, these declines came in below average volume and 4 of the 5 groups still remain in the top 25 on the 3 week price performance list.

  • Westport Innovations (WPRT) was featured last week with a 40.40 buy point. The buy point never triggered and WPRT fell steadily last week until finding support Friday at its 50 DMA, closing at 34.60. If the price action stabilizes early Monday morning speculators might consider a position here with a tight stop just below Friday's intraday low, ~ 33.50.


The Hsehold-Office Furniture group ranks in the top 50 on both the 2 and 5 week price performance lists, and in the MarketSmith industry group rankings has jumped from #102 to #57 over the past 3 weeks.

  • Steelcase (SCS) has a 9.86 pivot out of a 6 month consolidation. SCS is seeing accumulation with a 50 day up/down volume ratio of 1.8 and an accumulation/distribution rating of "B+". Analyst EPS estimates for FY '13 are +31%, FY '14 33%, and SCS's dividend currently yields 3.7%. What's most interesting about SCS is that it is undervalued compared to its industry group peers as measured by forward PE ratios. The industry group has 21 stocks of which 13 have analyst EPS estimates for the next two fiscal years. Examining this subset of 13 stocks SCS has a forward PE of 9.6 for FY '14 vs. an average forward PE of 13.8 for the other 12 stocks. SCS closed Friday at 9.73, an expansion of its forward multiple to the group average yields a price of 13.98 (+44%). SCS releases 2nd quarter earnings Wednesday, September 19 and this could be the catalyst to move shares higher. Analysts expect 20c per share, a significant beat or raising of guidance might get things started.

Energy related groups have had a tough couple of weeks, on the two week price performance list 6 groups rank in the bottom 50 and only one group in the top 50. However, the overall percentage declines have so far been modest, and on the 3 and 5 week price performance energy related groups are spread fairly evenly over the performance spectrum.

The Energy-Solar group has been on a tear, and is the top ranked group on the 1, 2, 3, and 5 week price performance lists, and is the #2 ranked group on the 13 week list showing a gain of 21.5%. However, the group still shows a 33% decline on the 26 week list. The MarketSmith industry group rank has improved from #197 (last) to #169 over the trailing 3 weeks.

Another beaten down energy group starting to show a pulse is the Energy-Coal group. The group ranks #58 on the 5 week list (+5%) but #189 on the 26 week list (-25.5%). The catalyst for further price improvement could be investor perceptions on the outcome of the presidential election. Obama administration policies have been hostile to fossil fuel exploration and production, but coal especially so. If polling starts to suggest a Romney/Ryan victory in November the coal group would be a primary beneficiary along with the other energy groups.

As mentioned in the Market Overview section above Gold broke out of a descending triangle pattern and volatility squeeze this week as seen in the chart below:


As this 5 minute chart of the Philadelphia Gold/Silver Index shows this run began precisely at 2 PM with the release of the FOMC minutes, which implied additional quantitative easing. The index jumped 4% in the next 3 hours of trading.


As with the Coal group, there could be a political dimension to the future performance of this asset class. Since the President's campaign consists of nothing more than television ads calling his opponents "extreme", a victory would result in zero mandate to govern. An Obama victory in November would result in kicking the can down the road on entitlement reform, and truly massive debt accumulation over the next 4 years, events likely to accelerate gold's ascent. Since the Romney/Ryan ticket is campaigning with a specific plan to reform entitlements and contain debt, their victory would likely mute gold's ascent.

  • Yamana Gold (AUY) is 1% past a 16.62 pivot out of a 10 week consolidation. The accumulation/distribution rating is a "B+", and over the last 8 quarters institutional sponsorship has increased from 763 to 971 funds. Analyst estimates project FY '13 EPS +44%.
  • Silver Standard (SSRI) engages in silver and gold exploration. SSRI saw heavy buying this week, and analysts estimate FY '12 EPS +100%, and FY '13 EPS +163%. MarketSmith's pattern recognition tool shows it climbing the right side of a cup shaped base, but a case could be made for it breaking out of a 12 week consolidation. Regardless of which interpretation you prefer, SSRI is an attractive chart.


 Follow up/Review:
The table below follows up on stocks mentioned in the last two blog posts.

Symbol
Date Published
Price at Publish
Current Price
Buy Point
BP hit?
Gain %
Comment:
FEIC
8/5/12
52.48
54.04
51.60
Y
3.0%
Low volume pull back last week.
IPGP
8/5/12
57.24
61.9
57.51
Y
7.6%
Modest 0.8% weekly decline, vol increased over previous wk
FTK
8/5/12
9.96
11.93
9.96
Y
19.8%
Still looks good here
KOG
8/5/12
8.16
9.17
8.16
Y
12.4%
Still looks good here
BCOR
8/5/12
15.33
15.66
16.02
Y
-2.2%
16.02 BP from 8/19 follow up.
IACI
8/5/12
53.10
51.5
52.78
Y
-3.0%
Could be adding a handle to its cup
KORS
8/19/12
52.09
53.92
50.69
Y
3.5%
Spiked higher Friday, +4.4% on volume 19% above avg.
VFC
8/19/12
153.03
150.22
152.97
Y
-1.8%
Low volume drift as price has fallen back in the handle.
CMI
8/19/12
103.19
100.09
103.19
Y
-3.0%
"stops at ~ 98.50". Low vol pul back to support.
TEN
8/19/12
31.53
30.22
31.53
Y
-4.2%
Looks OK here, finished at the top of Friday's range. 7-8% stop
FRAN
8/19/12
34.32
34.69
33.93
Y
1.1%
Looks good, consolidating around the pivot.
SCSS
8/19/12
29.81
28.23
29.81
Y
-5.3%
Price falls back into handle on low volume. 7-8% stop.
BECN
8/19/12
27.61
27.87
28.00
Y
-0.5%
Looks good, aided by strength in Builder groups
CHS
8/19/12
16.80
18.52
16.80
Y
10.2%
Beat earnings, sees "strong start" to 3rd qtr
FIRE
8/19/12
51.11
52.11
51.11
Y
2.0%
Nice price action Friday, stops at ~ 48.00
SNPS
8/19/12
31.28
33.28
31.28
Y
6.4%
Beat earnings, raised guidance.
MENT
8/19/12
15.99
16.34
15.99
Y
2.2%
High vol doji Friday, could pull back here. Set stops accordingly.





Avg.
2.8%









PRLB
8/5/12
37.89
32.64
39.08
N

Heavy selling, a dud for now.
CRZO
8/5/12
24.67
25.2
26.50
N

Hit 26.53 but no volume, still looks good here
Z
8/5/12
38.63
37.89
44.00
N

Drifting, potency of pattern questionable
CRI
8/19/12
53.43
54.41
57.27
N

Still looks attarctive, no pocket pivot yet.
CTB
8/19/12
20.22
19.87
19.00
N

BP "on a pull back towards $19", keep watching
OSK
8/19/12
25.22
24.72
26.34
N

Keep on the watch list, keep alert set.
WPRT
8/19/12
39.03
34.6
40.40
N

Maybe here at 200 DMA, if yes stops at 33.50
SKUL
8/19/12
16.66
14.65
17.76
N

Cup base has developed a handle, BP now 16.75
HAR
8/19/12
46.54
45.45
52.75
N

Cup base has developed a handle, BP now 46.84
SYMC
8/19/12
18.01
17.73
18.85
N

Cup base has developed a handle, BP now 18.09