Sunday, December 9, 2012

Sector & Group Rotation Notes – 12/9/12



Listed below are notes from the author's weekly analysis. The blog will not publish next Sunday 12/16, but will return Sunday 12/23.

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 3 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.

Industry Group
1 Week Gain
2 Week Gain
3 Week Gain
5 Week Gain
13 Week Gain
26 Week Gain
Philadelphia Semiconductor Index
1.4%
2.8%
6.6%
1.9%
-5.4%
1.8%
Russell 2000
0.0%
1.9%
5.9%
1.0%
-1.9%
6.9%
Pboe Oil Service Index
1.4%
1.7%
5.5%
2.9%
-3.3%
9.9%
Dow Jones Transportation Index
0.2%
1.5%
4.8%
0.4%
1.7%
1.3%
KBW Large Cap Bank Index
1.6%
0.3%
4.6%
-1.5%
0.1%
13.1%
DJIA
1.0%
1.1%
4.5%
0.5%
-1.0%
4.8%
Nasdaq Composite
-1.1%
0.4%
4.4%
-0.1%
-5.0%
4.2%
SP 500
0.1%
0.6%
4.3%
0.3%
-1.4%
7.0%
Philadelphia Housing Index
-2.7%
-1.8%
4.2%
-1.8%
7.6%
31.5%
Russell 1000 Energy Index
0.9%
0.2%
4.0%
0.2%
-2.4%
10.2%
Philadelphia Utility Index
0.2%
3.9%
2.8%
-3.5%
-3.9%
-5.7%
Philadelphia Gold/Silver Index
-4.8%
-7.0%
-2.2%
-9.4%
-9.6%
0.0%

A few red flags emerged into view last week as the markets, with the exception of the Dow, stalled. The S&P 500 gained only 0.1%, the Russell 2000 gained 0.04%, and the Nasdaq fell -1.1%. Many commentators have noted the Nasdaq was pulled down by Apple's 8.9% (weekly) decline, but even backing out Apple's impact the index still fell ~ 0.3%. Other disconcerting factors include defensive industry group rotation last week (more on this below), generally poor economic data, and no progress from the government on the fiscal front.

Monday's ISM came in below the 51.7 consensus estimate with a value of 49.5. Values below 50 indicate contraction, and this was the fourth month out of the last 6 with a sub-50 reading. Inventories were down significantly suggesting increased caution on the part of business with regard to future demand. Largely as a result of this moderation of inventory investment on Wednesday Goldman Sachs cut its fourth quarter GDP estimate to an annual rate of 1%.

Friday's employment data for November indicated a 146K gain in payroll, but both October and September's payroll data were revised lower . The unemployment fell to 7.7%, but this was due to a decline in the participation rate. The 63.6% participation rate remains well below the historical average.

Friday also saw the release of December's Consumer Sentiment; the index fell 8.2 to a value of 74.5, far below consensus expectations of 80 - 85.5.

No progress was reported in fiscal cliff negotiations and it appears unlikely an agreement will be reached before the expiration of the Bush tax cuts December 31. The President seems to have concluded that forcing the country over the cliff will allow him to negotiate from a position of greater strength in early January. What remains unknown is to what extent the market has priced in this outcome.


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)
7
7
13
8
6
9
# in the bottom 50 groups (out of 197)
9
7
4
9
7
7

28 Technology Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
9
9
9
6
0
0
# in the bottom 50 groups (out of 197)
9
8
6
10
18
18

30 Defensively Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
10
9
3
9
9
7
# in the bottom 50 groups (out of 197)
2
6
7
4
4
9

Last week's analysis noted the performance increase of defensively oriented groups but brushed it off as a result of an oversold bounce in utilities. This week that move continued as 10 of the groups landed in the top 50 of the 1 week price performance list, but this time there's no alternate explanation - investors are simply getting more defensive (none of the 10 groups were utilities). A continuation of this trend would not bode well for the current market uptrend.

Global:
China's new Communist Party chief Xi Jinping made remarks this past Wednesday suggesting he believed the Chinese economy had bottomed and that inflation was under control. The comments suggested a bias towards growth, and the Shanghai composite, which had been near four year lows, shot 2.9% higher in response. You can read more about his comments here, here, and here.
 
The Ishares Ftse China 25 (FXI) gained 3.4% on the week in volume 37% above average. The ETF is now 1% past a 38.15 pivot out of a cup & handle base. 

  
Also benefiting was Market Vectors Vietnam (VNM) which gained 5.2% for the week in almost two times average volume. The vast bulk of the gains occurred after Xi's comments.


Non dollar denominated emerging market equities stand to benefit from the monetization of US debt and the resulting currency devaluation. Although thinly traded, the Powershares FTSE RAFI Emerging Markets ETF (PXH) is seeing some accumulation with an up/down volume ratio of 3.0. It appears to have broken higher through its descending trend line on this weekly chart.



Industry Group Performance:

Energy: Freeport-McMoRan (FCX) shocked investors on Wednesday by announcing their purchase of McMoRan Exploration (MMR)   and Plains Exploration & Production (PXP)   for $2.1 billion and $6.9 billion respectively. The move was widely panned by investors and analysts as FCX declined 16% on the news, but MMR jumped 87% and PXP gained 23%. Regardless of one's view of the efficacy of these deals, they do suggest some see value in the Oil&Gas-U S Expl&Prod (G1310) group.

Another positive for the group came on Thursday when the US government released a potentially pivotal study which determined the US economy would see greater benefit from allowing natural gas exports. The administration has indicated the report would be central to its decision to allow exports. You can read more here


Late Friday the Canadian government approved a $20B Chinese investment in oil-sands operator Nexen, and some are speculating this will help the energy sector on Monday.

Overall energy related industry groups are mostly quiet. The Energy-Solar (G1320) and Oil&Gas-Drilling (G1381) groups are performing well. The Energy-Solar group has spiked higher and based on price performance is now the #7 ranked group over the trailing 26 weeks with a 26.6% gain, and the #1 ranked group over the trailing 2, 3, and 5 week periods. Its MarketSmith industry group ranking has improved +158 to #28 over the past 5 weeks. The Oil&Gas-Drilling group ranks #43 on the 26 week price performance list with a 14.8% gain, and is in the top 40 on the 1, 2, 3 and 5 week price performance lists. In MarketSmith's industry group rankings the group is +67 to #88 over the past 6 weeks.

A simple screen of the Oil&Gas-U S Expl&Prod (G1310) group looking for strong earnings growth returned 11 names. The key parameters were price > $5, volume > 250K, current year EPS estimate +10%, and next year EPS estimate +10%. The names returned were OAS, EOG, NOG, BRY, CRZO, KOG, CLR, ROSE, PXP (the FCX acquisition), QRE and BCEI.
 
The Sector Trends blog has tweeted this set up in CRZO several times since Nov. 28. CRZO fell in early November after disappointment over quarterly results. CRZO has current year EPS forecast +66% and next year's +93%. The trailing PE is 15, and the PEG ratio is 0.70. A 7 1/2 day short interest could provide some fuel for a move higher out of this small ascending triangle. 




Kodiak Oil & Gas saw some heavy buying in the back half of the week helped along by UBS who initiated coverage with a "buy" rating. KOG gained 5% on Wednesday in over 2x average volume, its strongest volume since August. FY '12 EPS are forecast +327% and FY '13 +53%.


Continental Resources (CLR) gained 8% for the week in volume 67% above average. CLR FY '12 EPS are forecast +20% and FY '13 +43%. This past week CLR broke higher out of a 12 week descending channel.


Housing: 6 of 9 housing/building related groups finished in the bottom 50 of the 1 week price performance list, 5 of 9 on the 2 week list. Over longer periods of time these groups look healthy, and 5 of these groups rank in the top 25 of MarketSmith's industry group rankings. However, this move started 14 months ago led by the Bldg-Resident/Comml (G1520) group, industry group rank #8. Currently 12 of 19 stocks in this group are trading under their 50 day MA, including 60% of the 10 stocks with RS 90+. It's not a cause for alarm at the moment, but something to keep an eye on.

Staffing:  The Comml Svcs-Staffing (G1011) group continues to perform well and finished this past week ranked #15 on the 1 week price performance list with a 1.9% gain. Last week's analysis mentioned RHI as a buy at current levels (28.26) and for the week it gained 3.5%. ASGN still looks promising with a 20.74 buy point.

Retail: Last week's employment report noted strong seasonal hiring by retail, suggesting retailers are anticipating a solid holiday selling season. However, that optimism isn't being bought by investors as retail related industry groups are suffering on the shorter term price performance lists. Check out the price performance of the retail related groups in the table below (there are a total of 20 retail related groups).

Price Performance

# groups top 50
# groups bottom 50
1 week
2
9
2 week
3
10
3 week
3
9
5 week
4
7

Fiber Optics: The Telecom-Fiber Optics group (G3552) had another good week coming in at #43 on the 1 week price performance list with a 1% gain. The group now ranks #12 on the 5 week list +5.9%. CIEN crossed it's $15 buy point to finish the week at 15.60. JDSU is up $1 from its 11.30 buy point.



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