Sunday, February 24, 2013

Sector & Group Rotation Notes – 2/24/13



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
Dow Jones Transportation Index
0.0%
0.6%
1.5%
4.4%
17.7%
16.1%
Philadelphia Semiconductor Index
-0.8%
0.0%
1.1%
3.5%
15.1%
6.5%
Philadelphia Utility Index
1.3%
1.0%
0.9%
3.5%
8.9%
0.2%
Russell 2000
-0.8%
0.3%
0.5%
2.6%
13.5%
13.2%
DJIA
0.1%
0.1%
-0.1%
2.6%
7.6%
6.4%
Pboe Oil Service Index
-2.4%
-1.1%
-1.9%
2.4%
12.8%
8.4%
Russell 1000 Energy Index
-0.4%
-1.0%
-0.7%
2.1%
7.9%
7.2%
SP 500
-0.3%
-0.2%
0.1%
2.0%
7.5%
7.4%
KBW Large Cap Bank Index
-1.1%
-0.9%
-0.4%
1.9%
10.8%
15.5%
Nasdaq Composite
-0.9%
-1.0%
-0.5%
0.9%
6.6%
3.0%
Cboe Technology Index
-0.6%
-1.5%
0.6%
-1.2%
-0.6%
-6.8%
Philadelphia Housing Index
-4.9%
-2.3%
-3.5%
-2.7%
10.0%
24.8%
Philadelphia Gold/Silver Index
-5.3%
-10.6%
-10.3%
-15.5%
-21.8%
-19.1%

FOMC minutes released this past Wednesday indicated members are more openly debating the cost/benefit of additional bond purchases. Following the mid afternoon release markets tanked, logging two consecutive distribution days Wednesday and Thursday before bouncing higher in weak volume on Friday.

Other economic data released last week also impacted the market. On Tuesday the Housing Market Index missed expectations slightly coming in at 46 vs. consensus expectation of 48. Housing starts missed on Wednesday although permits beat slightly, and Thursday existing home sales showed tepid albeit supply constrained growth. These mixed results combined with the FOMC minutes led to a 4.9% weekly decline for the Philadelphia Housing Index. It didn't help that Toll Brothers and Owens Corning both missed estimates, although both saw an improving housing market going forward.

743 companies announce earnings next week, including 263 with market caps 1B+. Names to watch include Ocwen Financial, Three D Systems, Chuy's, Mastec, First Solar, US Silica, Valeant Pharmaceuticals, Jazz Pharmaceuticals, Salesforce, Priceline, Autozone and Chicos Fas.






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.

30 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
3
5
11
7
# in the bottom 50 groups (out of 197)
13
15
14
12
8
8

28 Technology Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
4
7
7
7
7
0
# in the bottom 50 groups (out of 197)
6
9
11
10
6
14

30 Defensively Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
15
10
12
8
6
7
# in the bottom 50 groups (out of 197)
1
4
2
5
9
11

In this space last week the blog noted "defensively oriented groups are improving" but attributed it to the groups returning to their mean performance average as opposed to a deliberate rotation. The outperformance of defensively oriented groups picked up steam last week, but for the moment the blog is  maintaining some skepticism as one would expect defensive groups to outperform in a downdraft like we experienced last week. In the author's opinion its more telling when you see the rotation occurring as the market is advancing (see the September 23, 2012 blog post for an example of this). Regardless, the market will give us an answer over the coming weeks; continued defensive outperformance would be a negative.

For the week commodity oriented groups fell 1.9%, tech oriented groups fell 0.9%, and defensive groups gained 0.2%.

Industry Group Performance:

Energy: Energy related groups for the week fell with the overall market, but the Oil&Gas-Machinery/Equip group (G3533), Oil&Gas-Field Services group (G1380), and Oil&Gas-Drilling group (G1318) all finished in the bottom quartile on the 1 week price performance list. Refiners still look good, and CLMT still looks good.

Interestingly the Oil&Gas-U S Expl&Prod group (G1310) gained 0.1% for the week. 26 of the stocks from this group release earnings next week including GPOR, OAS, ROSE, CLR, KOG & CRZO.

Autos: Blog posts in Nov/Dec last year highlighted emerging strength in auto related industry groups and by mid January all of the sector's groups ranked in the top 50 of MarketSmith's industry group rankings. This performance has since begun to wane, and last week all 5 of the sector's groups finished in the bottom quartile of the 1 week price performance report and only two groups remain in MarketSmith's top 50.

Also impacted last week was the Retail-Whlsle-Automobile group (G5014). While the group still enjoys a MarketSmith industry group rank of 31, the group now ranks #178 on the trailing 3 week price performance list with a 3.3% loss. More importantly last week LAD, ABG and SAH all reported earnings and pulled back -2.7%, -6.5%, and -5.4% respectively.

It looks like the run in these names is over with for now.

Housing: As mentioned above the housing sector took a hit last week after the FOMC minutes. Particularly hard hit was the Bldg-Resident/Comm group (G1520) which fell 4.5% for the week, and fell to #61 in MarketSmith's industry group rankings, it's first ranking outside the top 30 in 57 weeks.

However, not all groups in the sector are suffering; the Bldg-Wood Prds group (G2400), Bldg-A/C & Heating Prds group (G3585), Bldg-Heavy Construction group (G1621) and Bldg-Constr Prds/Misc group (G3299) are still holding up well.

Finance: The Finance-Mrtg&Rel Svc group (G6151) ranks #11 in MarketSmith's industry group rankings but last week finished #197 on the 1 week price performance list with a 6.8% decline. Although most of this decline seems to be caused by two stocks (SNFCA, -30.4% for the week and CLGX, -11.5%) its none the less a reason for caution.

Most readers are probably interested in one of the mortgage servicers Ocwen (OCN), Nationstar (NSM) or Walter Investment (WAC). Ocwen is the first of these three to report earnings, and is scheduled to do so Thursday 2/28. If Ocwen surprises look for NSM and WAC to benefit, if it disappoints look for collateral damage. If OCN gaps on the news its possible NSM and WAC could make sympathy moves (without the gap). NSM and WAC are scheduled to report Thursday, March 7.

Banks: The regional banking groups (Southeast (G6022), West/Southwest (G6024), Midwest (G6023) and Northeast (G6021)) are showing encouraging price performance with large positive deltas between their 3 and 13 week price performance rankings. It appears the names with better growth projections have already moved, but FHN, EWBC, and BBCN could have potential.

Retail: The Retail-Whlsle-Auto Parts group (G5013) enjoyed a great run back in 2011, maintaining a MarketSmith industry group rank in the top 15 from 8/27/11 through 1/28/12. From there it's been mostly downhill with the group hitting bottom six weeks ago at #193. However, recently the group's performance has turned around and the group now ranks #9 on the trailing 5 week price performance list with a 9.3% gain, and has climbed +47 in MarketSmith's industry group rankings to #146.

AutoZone (AZO) is seeing heavy accumulation with a 50 day up/down volume ratio of 1.5, a 25 day ratio of 2.2, and a "B" accumulation/distribution rating. Institutional sponsorship has increased steadily over the last 7 consecutive quarters. Analyst's project FY '13 EPS +18%, FY '14 +13%. AZO is scheduled to report earnings this Tuesday 2/26 BMO. Buy point ~ $390.


Software: The Computer Sftwr-Security group (G3220) is another group which seems to be recovering after falling on hard times. The group ranked #185 just two weeks ago, but helped along by President Obama's call for increased internet security has jumped to #159, and ranks #22 on the trailing 5 week price performance list with a 6.6% gain. The group could also be benefiting from takeover speculation as analysts theorize group members are attractive takeover candidates for larger tech companies seeking to expand.

Palo Alto Networks (PANW) broke out of a triangle pattern on Friday, gaining 4.9% on volume 57% higher than average; it's also showing a Bollinger Band squeeze and a 3 weeks tight on the weekly chart. PANW offers a disruptive next generation firewall solution that offers real time protection for external cloud based applications. PANW is scheduled to report earnings Thursday 2/28 BMO.