Sunday, January 27, 2013

Sector & Group Rotation Notes – 1/27/13



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 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 Housing Index
2.5%
4.9%
7.0%
12.3%
18.2%
39.2%
Pboe Oil Service Index
2.0%
5.5%
5.4%
10.8%
11.5%
8.8%
Dow Jones Transportation Index
3.1%
5.3%
6.1%
9.9%
16.2%
14.5%
Philadelphia Semiconductor Index
1.2%
3.1%
4.5%
7.7%
13.1%
8.1%
Russell 2000
1.4%
2.8%
3.0%
6.8%
11.3%
13.7%
Russell 1000 Energy Index
1.9%
4.1%
4.2%
6.7%
6.5%
8.9%
KBW Large Cap Bank Index
1.2%
1.8%
0.7%
5.5%
9.9%
17.4%
DJIA
1.8%
3.0%
3.4%
5.3%
6.0%
6.3%
SP 500
1.1%
2.1%
2.5%
5.1%
6.4%
8.4%
Nasdaq Composite
0.5%
0.8%
1.5%
4.3%
5.4%
6.5%
Philadelphia Utility Index
1.7%
2.5%
1.2%
2.6%
-1.5%
-6.1%
Cboe Technology Index
-2.7%
-2.9%
-2.2%
-0.5%
-2.2%
-1.3%
Philadelphia Gold/Silver Index
-6.5%
-7.7%
-7.2%
-5.9%
-17.5%
-0.6%
           
Earnings drove the major market indexes solidly higher last week with gains ranging from +0.5% for the Nasdaq to +1.9% for the Dow. The Nasdaq in particular had a very strong week, gaining approximately 1.7% on the week ex-AAPL. Apple is now 37% of its high, and it's market cap has declined to ~ 414B, making it now the world's second most valuable company behind Exxon (~ 418B).

As of December 31, AAPL represented almost 36% of the weighting of the Cboe Technology Index. Year to date the index is -1.3% while over the same period AAPL is -17.3%. Assuming a revised one third weighting for AAPL, the index ex-Apple is up ~6.7% YTD, exceeding the Russell 2000's 6.58% YTD return.

Netflix led the earnings parade announcing 0.13 vs. -0.13 consensus, a huge surprise that drove the stock up 42% on Thursday and another 15% on Friday. IBM, HAL, CELG, SBUX and numerous others announced positive results. Bloomberg reports 76 percent of the 147 companies in the S&P 500 that have released results so far this reporting season have beat analyst projections, while 67 percent have topped sales estimates. They add that the S&P 500's PE ratio is 9.8% below its 6 decade mean.

Next week will see more earnings releases. In the housing sector Pulte, Ryland, DR Horton, Meritage Homes, Sherwin Williams and Fortune Brands all report. The energy sector will see numerous reports, including releases from Delek, Exxon and Marathon Petroleum. Other companies reporting include Amazon, Mastercard, Las Vegas Sands, Facebook, Caterpillar, Commvault, VMware, Eastman Chemical and numerous others.

Last week's economic data was mostly positive. On Tuesday existing home sales came in slightly below consensus at 4.94M compared to a consensus range of 4.95 - 5.20, but analysts suggested the miss was driven by lack of supply. On Thursday new jobless claims came in at 330K, 30K below consensus.

Also on Thursday the PMI Manufacturing Index flash report came in above the top of the consensus range at 56.1. Readings over 50 indicate growth, and this month's 56.1 is an increase over December's 54.0 reading suggesting that growth is accelerating.

Friday's new home sales report came in below consensus at 369K, but the big news was that November was revised +22K higher to an annual rate of 398K, the highest since the stimulus fueled number from April 2010. The report also indicated the median price had increased to $248.9K, the highest in 5 years.

Economic data in the Eurozone is improving. Last week Euro PMI, for both services and manufacturing, came in at 48.2, up from December's 47.2, and exceeded the 47.5 forecast. While the 48.2 reading still indicates contraction, the increase from December's reading suggests the contraction is abating. 






 

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)
4
5
7
9
10
9
# in the bottom 50 groups (out of 197)
9
9
9
5
7
5

28 Technology Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
13
6
9
6
3
1
# in the bottom 50 groups (out of 197)
5
8
7
5
3
11

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

Last week's data seemed to show a modest rotation into defensive groups; that vanished this past week and was most likely in anticipation of a debt limit fight that never materialized.

Tech had a solid week with 13 tech related groups out of 28 total finishing in the top 50 of all groups on the one week price performance list.

Industry Group Performance:

Energy: As noted last week the Pboe Oil Service Index has broken decisively above its 21 month long descending trendline, and the move continued last week with a 2% gain. The Oil&Gas-Drilling group (G1381), Oil&Gas-Field Services group (G1380), and Oil&Gas-Refining/Mktg group (G2900) all rank in the top 53 of the trailing 5 week price performance list. On Friday Haliburton (HAL) announced beating comfortably on both earnings and revenues.

On Tuesday Atwood Oceanics (ATW) broke out of an 11 week flat base and ended the week +6.3% in volume 43% above average. ATW has FY '13 EPS forecast +17%, FY '14 EPS +33%. SMR "A", Accumulation/Distribution rating "A", 50 day up/down volume ratio 1.3, 25 day ratio of 2.7. ROE 15, PE 13. While just slightly out of its buy zone, given the index breakout and superior short term industry group performance ATW looks attractive here, and certainly on any pullback into the 5% buy zone. Weekly chart below:


Thursday after the close Rosetta Resources (ROSE) reported preliminary operational results for 2012 that included double-digit growth in production and proved reserves and significantly reduced well costs. On Friday jumped 5.6% on almost 3x average volume. SMR "A", Accumulation/Distribution "B+", 50 day up/down volume 1.1, 25 day 2.1. FY '12 EPS forecast +49%, FY '13 +46%. ROE 18%, PE 19. ROSE is 2% past its pivot out of an 11 week cup shaped base. Weekly chart below:



On Friday Haliburton (HAL) beat earnings expectations 0.67 vs. 0.61 and jumped 5.1% on 3x average volume. HAL's weekly chart below shows it on the cusp of breaking above a resistance area stretching back over the past year and a half. HAL is under accumulation with a 50 day up/down volume ratio of 2.0.



Oasis Petroleum (OAS) is a constituent of the Oil&Gas-U S Expl&Prod group, a group not yet showing the performance characteristics of the Drilling and Field Services groups mentioned above. However, OAS possesses an "A" accumulation/distribution rating, 50 day up/down volume is 1.6, and ROE 13%. OAS trades at 34x earnings but analysts project FY '12 EPS +71%, FY '13 +61%. OAS is 1% past its pivot out of a 50 week consolidation.



Internet: The Internet-Content group (G3334) has a MarketSmith industry group rank of #106 and is ranked #105 on the trailing 5 week price performance list with a 9.8% gain. Things started to heat up last week though as the group gained 5.4% to rank #6 on the trailing 1 week price performance list.

LinkedIn (LNKD) was highlighted two weeks ago and has since tacked on 5%. LNKD closed at a new all time closing high on Friday, and is 1.4% from its all time intraday high. FY '12 EPS are forecast +106%, FY '13 +82%, and sales over the last 8 quarters are +80%. LNKD is entering blue sky territory...



Apparel: The Apparel-Clothing Mfg group (G2300) has been underperforming ranking #154 on the trailing 5 week price performance list with a 4% gain; and a MarketSmith industry group rank of 80.

Coach (COH) announced Wednesday morning and missed on both earnings and revenues. Management trotted out hurricane Sandy excuses but at the same time said their outlook was "more cautious".  COH fell over 17% for the week on 3.5x average volume. More than a few investors are attributing Coach's weakness to market share gains by Michael Kors (KORS), and on Friday GS reiterated their "conviction buy" rating on KORS, citing "competitor data".

KORS was highlighted two weeks ago in the January 13th Sector Trends blog. That analysis pointed out the heavy accumulation in KORS and gave an early buy point with a break of the descending trendline seen in the chart below, ~ $54. KORS has another buy point at 58.62.



Under Armour (UA) saw heavy volume Thursday and Friday after the resignation of the executive in charge of their footwear division. Reaction Thursday suggested the market viewed this as a negative omen for their business results, although the stock recovered somewhat Friday. UA announces earnings on Thursday, January 31. The view here is this probably is a negative, but if this view is incorrect a break of the descending trendline after announcing positive results would represent an opportunity.

 

Software: There aren't any software related industry groups with a MarketSmith industry group rank in the top 60, but 7 of the groups made the top 60 of the 1 week price performance list, so performance in this area could be improving.

Ultimate Software (ULTI) has been seeing accumulation over the trailing 10 weeks with a 50 day up/down volume ratio of 1.9. FY '12 EPS are forecast +55%, FY '13 +38%. ROE 23%, and institutional sponsorship has increased 289 > 318 > 353 > 373 over the last 4 quarters. ULTI has averaged +20% sales growth over the last 4 quarters, and +30% EPS growth. A break of the descending trendline at ~ 100 would represent an early buy point in this 20 week consolidation.


Cadence Design Systems (CDNS) is 3% past its pivot out of a 15 week consolidation. CDNS is seeing accumulation with an Accumulation/Distribution rating of "B" and a 50 day up/down volume ratio of 1.5. CDNS trades at 19 x earnings with FY '12 EPS forecast +49%, FY '13 +20%.



Housing: As readers surely know the housing sector has been on a tear. As noted above Pulte, Ryland, DR Horton, Meritage Homes, Sherwin Williams and Fortune Brands all report this week and will likely impact the trend +/- depending on results.

Meritage Homes (MTH)is 1% past its pivot out of a 15 week consolidation. MTH has been picking up institutional sponsorship and is due to release earnings this Thursday. FY '13 EPS are forecast +188% to 2.10, giving MTH a forward PE of ~ 20.




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