Sunday, December 2, 2012

Sector & Group Rotation Notes – 12/2/12



Listed below are notes from the author's weekly analysis.

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 charts displayed here are the property of MarketSmith, and are published here with their permission.

Market Overview:
The table below shows price performance for key markets and sectors over the trailing 26 weeks, and this week is sorted high to low by 2 week performance so as to better identify trends within the current uptrend. The green and red shading denotes relative performance +/- to the SP 500 for the time period in question.
Index
1 Week Gain
2 Week Gain
3 Week Gain
5 Week Gain
13 Week Gain
26 Week Gain
Philadelphia Housing Index
0.9%
7.1%
2.7%
3.0%
14.2%
43.0%
Russell 2000
1.8%
5.9%
3.4%
1.1%
1.2%
11.5%
Nasdaq Composite
1.5%
5.5%
3.6%
0.7%
-1.8%
9.6%
Philadelphia Semiconductor Index
1.4%
5.2%
1.3%
1.9%
-5.5%
6.0%
Dow Jones Transportation Index
1.3%
4.7%
2.0%
1.3%
2.2%
4.2%
SP 500
0.5%
4.1%
2.6%
0.3%
0.7%
10.8%
Pboe Oil Service Index
0.2%
3.9%
4.3%
-0.6%
-2.4%
11.5%
DJIA
0.1%
3.5%
1.6%
-0.6%
-0.5%
7.5%
Russell 1000 Energy Index
-0.6%
3.1%
1.8%
-1.8%
-0.5%
13.5%
KBW Large Cap Bank Index
-1.2%
3.0%
0.9%
-1.4%
2.9%
15.8%
Philadelphia Gold/Silver Index
-2.4%
2.7%
-6.0%
-6.9%
0.2%
4.6%
Philadelphia Utility Index
3.6%
2.6%
1.3%
-4.7%
-3.6%
-3.0%

The major broad based equity indexes are now being lead by the Russell 2000 and Nasdaq with 5.9% and 5.5% gains over the trailing two weeks, the type of behavior one likes to see in a market uptrend.

Utilities may have bottomed as the Philadelphia Utility Index jumped 3.6% for the week. A review of utility related groups in MarketSmith shows weekly volume in the Utility-Diversified group +30% and in the Utility-Gas Distribution group +32%. Volume in the other two related groups increased more modestly, Utility-Water Supply  +5% and Utility-Electric Power +10%. Price increases across all 4 groups were healthy, ranging from +2.7% to +3.4%. It appears the pullback in these groups is over and they are beginning to rebound.

On Monday the release of the Dallas Fed Manufacturing Survey showed little change from October, but both the general business activity and company outlook index worsened as they registered negative readings, the first for the company outlook since April. Other indexes in the survey  reflecting future business conditions also fell sharply. On Friday the Chicago PMI mirrored this outlook; while the index itself came in slightly positive at 50.4 the forward-looking new orders component showed significant contraction falling 5 points to 45.3.

On Tuesday consumer confidence numbers held steady, mildly exceeding consensus estimates. Of special interest to readers the report showed a large 1.5% jump to 6.9% for those expecting to buy a house in the next 6 months, and those who plan to buy a major appliance in the next 6 months increased 4.0% to 50.6%.

Housing data released last week was mixed. On Tuesday the Case-Shiller Home Price Index pointed to increasing momentum with a 0.4% increase, only to have Wednesday bring a 20K downward revision to September's new home sales and a 19K miss for October's consensus number. On Thursday November's Pending Homes Sales Index jumped a very strong 5.2%, easily exceeding the 0.5% - 4.0% consensus range. For the week housing increased modestly as the  Philadelphia Housing Index gained 0.9%.

On Thursday real GDP for the third quarter was revised upward to 2.7% compared to an advance estimate of 2.0%, and the second quarter rate of 1.3%. Most MSM news outlets celebrated the news, with one network news anchor heralding the "surprising new strength" in the economy. However, the internal composition of the data suggests a shift away from demand components, and nearly all reports ignored the contradictory implications of GDI increasing over the past two quarters at an annual rate of only 0.5%. This data suggests the GDP number should be viewed with a healthy level of skepticism.

The Sector Trends blog makes a conscious effort to remain focused on markets and stocks in both its blog posts and tweets, and realizes readers are not interested in the author's political views. The following political observation is not gratuitous venting, nor is it meant to insult readers who are Democrats, but is written only to highlight the current risk to the market from the political class.

"Fiscal Cliff" negotiations went nowhere last week as the President eschewed serious negotiation and continued campaigning.  Instead Tim Geithner made congressional Republicans a deliberately insulting offer designed to be rejected. The President appears to believe he is in a win-win situation: if Republicans cave to his demands he wins with higher taxes, and if negotiations fail he wins with even higher taxes (more money to redistribute), while at the same time getting to blame Republicans for the resulting tax increases and economic problems. Regardless of how the reader views the President's intent, the markets price action suggests most participants are anticipating a drama-free resolution to these negotiations. These actions suggest this is an unlikely outcome, and Erskine Bowles agrees. 


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)
8
12
9
5
7
8
# in the bottom 50 groups (out of 197)
6
4
7
8
6
9

28 Technology Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
11
9
5
4
0
1
# in the bottom 50 groups (out of 197)
7
7
9
10
20
15

30 Defensively Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
8
3
6
8
6
5
# in the bottom 50 groups (out of 197)
10
12
5
8
7
8

Last week only 5 tech groups made the top 50 groups in 1 week price performance, this week the number more than doubled to 11. While this is not an exciting number, it does suggest the decline in tech is abating. Weekly price performance roughly correlated with industry group rank. All 3 semiconductor related industry groups finished in the top 50 of the 1 week price performance list, and the top 25 of the 2 week list; however their performance fades when viewed over 3 week or longer time frames. Software related groups remain very weak.

Last week only 3 defensive groups made the top 50 of the 1 week list, this past week that increased to 8. However, 4 of those 8 groups were utility related and as discussed above the price action in utilities appears to be more a reaction to oversold conditions.

Industry Group Performance:

Autos: The Sector Trends blog has been covering  the gathering strength in auto related groups for the past 4 weeks, this WSJ article does a good job of covering the fundamental back story. The strength in these groups continued last week as all 5 auto related groups accelerated higher in the MarketSmith industry group rankings. Their weekly performance is summarized in the table below:



1 week Performance

Symb.
Price Perf.
Price Rank

Ind. Group Rank
Ind. Group Δ
Auto/Truck-Replace Parts
G3715
3.4%
20

9
+14
Auto/Truck-Tires & Misc
G3011
3.9%
11

70
+54
Auto Manufacturers
G3711
4.0%
10

77
+26
Auto/Truck-Original Eqp
G3714
1.7%
83

103
+11
Trucks & Parts-Hvy Duty
G1010
-0.3%
175

134
+1

The industry group change in rank (Δ) over the trailing 5 weeks ranges from +55 to +126.

Delphi Automotive (DLPH) was highlighted in the Nov. 11th blog post and is now 3% past the 32.98 buy point. DLPH is under heavy accumulation with an accumulation/distribution rating of "B+" and an up/down volume ratio of 1.7. Institutional sponsorship has exploded, going from 122 > 318 > 497 > 571 funds over the last 4 reporting periods. The trailing PE is 9, and FY '12 EPS are forecast +13%, FY '13 +15%. DLPH is emerging from a 9 month base. 


Ford Motor (F) has an 11.59 buy point out of a 42 week cup & handle base.  Ford is seeing heavy accumulation with a 50 day up/down volume ratio of 1.5 and an accumulation/distribution rating of "B+". A return to the 52 week high last seen in January would represent a 14% gain from current levels.


Tesla Motors (TSLA) broke above its descending trend line last week and is under accumulation. Institutional funds have increased over the last 4 quarters 349 > 359 > 384 > 393. The up/down volume ratio will spike higher next week as the trailing 10th week drops off the calculation, the accumulation is easily seen on this weekly chart.


These auto dealers from the Retail-Whlsle-Automobile (G5014) group could also have potential:

Lithia Motors (LAD) has a trailing PE of 13 with FY '12 EPS estimates +48%, and FY '13 +11%. This company is 7-for-7 in positive earnings surprises over the last seven quarters and analysts have been increasing earnings estimates for the next quarter and fiscal year. LAD is under accumulation with an up/down volume ratio of 1.8 and an accumulation/distribution rating of "B"; institutional sponsorship has increased steadily for the last 8 quarters. RS 95, EPS 99. LAD has a 37.15 buy point out of a 6 week flat base.

Asbury Automotive Group (ABG) has averaged an EPS growth rate of over 50% for the last 4 quarters yet trades with a PEG ratio of 0.50. Given it's EPS growth and low valuation it's not surprising that ABG is under heavy accumulation with an up/down volume ratio of 1.7. Institutional sponsorship has increased 212 > 249 > 273 > 288 over the last 4 quarters. FY '12 EPS estimates are forecast +44%, FY '13 +11%. RS 86, EPS 90. ABG saw heavy buying Tue-Fri last week, and looks like a buy at current levels only 1.7% over its 50 day MA.


Carmax (KMX) does not have the strong EPS projections of LAD or ABG, but has RS at a new high and price is just 0.76 shy of reaching a new all time high. The accumulation/distribution rating is "A-" and institutional sponsorship has increased 792 > 827 over the last quarter. 


Fiber Optics: This blog's Nov. 11th post pointed out the strength in the fiber optic group that resulted from ATT's (T) decision to spend $22B on capital projects and $14B to improve its wireless networks. Since that time the Telecom-Fiber Optics (G3552) group ranks in the top 30 of the 1, 2 and 5 week price performance lists. Its 5 week gain of 6.9% (#17) is actually skewed substantially lower by Sycamore Networks (SCMR) going ex-dividend 11/13 on a $2 special dividend  that was part of the company's dissolution plan. For the week ending 11/16 SCMR finished down over 50%.

JDSU Uniphase (JDSU) is now 7.3% past the 11.30 buy point identified in the Nov. 11 blog post, but CIEN is still below its $15 buy point. Institutions are interested, CIEN has an accumulation/distribution rating of "A-" and institutional sponsorship has increased 348 > 392 > 445. A move back to August highs will yield a 20% gain.



There are numerous other charts in the group which should provide opportunity for the more speculatively inclined reader. Pull up the industry group and use MarketSmith's "show all component data" feature to drill down and review all 14 of the groups stocks.

Staffing: The Comml Svcs-Staffing group (G1011) is ranked #33 on the 13 week price performance list with a 8.8% gain. Over the same 13 week period the group's MarketSmith industry group rank has improved +66 from #142 to #76.

On Assignment (ASGN) has 8 consecutive quarters of +50% earnings and +20% sales growth; last quarter's earnings were +62% and sales +139%. ASGN has a "B+" accumulation/distribution rating, a 1.2 up/down volume ratio, and is seeing consistent increases in institutional sponsorship. ASGN has a 20.74 pivot out of a 10 week flat base.


Robert Half (RHI) is also showing signs of accumulation and the weekly chart below shows its steady history of profit and sales increases. RHI looks like it can be purchased here at current levels, see the commentary on the two charts below for additional explanation.



Safety: The Security/Safety group is MarketSmith's #10 ranked industry group, up from #79 only 6 weeks ago. Smith & Wesson (SWHC) has seen very strong EPS and sales growth over the trailing 3 quarters, and is seeing accumulation with an accumulation/distribution rating of "A+" and institutional sponsorship that has increased 146 > 181 > 214 > 240 over the trailing 4 quarters. Strum Ruger (RGR), a Smith & Wesson competitor, recently announced a special dividend. It's possible SWHC could do the same when it announces earnings December 6. SWHC has $0.87 of cash per share and management holds a 5% ownership stake.


Finance: Last week this blog highlighted the interesting price action of the Finance-Consumer Loans (G6148) industry group. For the week the group gained a solid 2.0% ranking #71 on the 1 week price performance list, and now ranks #14 on the 3 week price performance list. Not that surprisingly the group also jumped +30 in MarketSmith's industry group rankings from #151 to #121.

First Cash (FCFS) was highlighted last Sunday and on Monday broke out past its 47.50 pivot gaining 1.1% in 42% higher volume. FCFS closed at 49 on Thursday but pulled back 1.4% on Friday.


DFC Global (DLLR) continued to move modestly higher out of its descending channel and could provide an entry with a move over the 200 day MA.


Food: The Food-Packaged group (G2091) has very strong price performance: over the past week +3.4%, #18; over 5 weeks +4.9%, #37; over 13 weeks +9%, #30; and over 26 weeks +25.1%, #14. Despite this consistent positive price performance the group's industry rank is only 60.

Amira Nature Foods (ANFI) is a recent IPO with an interesting chart:


Most stocks in this group are likely to be slow, though perhaps steady performers, and could be more "cliff resistant" than other items highlighted in this week's post. The following tickers are worthy of review by interested readers: POST, FLO, HNZ, K, CPB, GIS, SJM, UN, and JJSF.
  
Leisure: The Leisure-Gaming/Equip group (G7901) has gained 9.8% over the last 13 weeks, ranking #25 on the 13 week price performance list. Over the same period of time the group is +57 to #129 in MarketSmith's industry group rankings.

Monarch Casino (MCRI) blew out of this triangle pattern on Friday gaining 4.5% on over 2x average volume. Last quarter's sales and earnings were sharply higher, +32% and +79% respectively, and the up/down volume ratio is a very strong 2.1. MCRI is a very thin stock averaging only 24K shares daily, but it might be good for a very small position - it looks like it's headed higher from here.




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