Sunday, February 3, 2013

Sector & Group Rotation Notes – 2/3/13



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
Pboe Oil Service Index
2.3%
4.4%
8.0%
16.8%
16.3%
13.0%
Philadelphia Housing Index
-1.6%
0.9%
3.2%
12.5%
13.9%
40.6%
Dow Jones Transportation Index
-0.2%
2.8%
5.1%
12.2%
14.6%
15.2%
Philadelphia Semiconductor Index
1.2%
2.4%
4.4%
11.6%
13.0%
7.8%
Russell 1000 Energy Index
0.9%
2.8%
5.1%
10.9%
8.7%
9.7%
Russell 2000
0.7%
2.1%
3.5%
9.5%
11.9%
15.6%
DJIA
0.8%
2.6%
3.9%
8.3%
7.0%
7.0%
KBW Large Cap Bank Index
1.1%
2.3%
2.9%
8.2%
9.3%
18.8%
SP 500
0.7%
1.8%
2.8%
7.9%
7.0%
8.8%
Nasdaq Composite
0.9%
1.4%
1.7%
7.4%
6.6%
7.1%
Philadelphia Utility Index
0.8%
2.6%
3.3%
6.0%
0.4%
-4.6%
Cboe Technology Index
1.0%
-1.7%
-1.9%
2.4%
-0.1%
-2.8%
Philadelphia Gold/Silver Index
0.7%
-5.8%
-7.0%
-5.4%
-15.1%
1.1%

Monday through Thursday the market seemed to struggle as the major indexes declined slightly in elevated volume. That all changed quickly after Friday's employment data as the markets rallied sharply to finish the week with solid gains. While earnings news will continue to affect stocks on an individual basis, last week the market seemed to revert to giving  economic data preeminence.

Economic data last week was mixed, although the market's reaction to the data suggested investors are now biased towards seeing the glass as half full.

On Monday durable goods orders exceed expectations and suggested manufacturing may be gaining momentum. Expectations for new orders were 1.6%, actual was 4.6%. Backing out transportation expectations were for a 0.4% increase, actual was 1.3%. Monday's Dallas Fed manufacturing survey also came in ahead of expectations at +5.4% vs. consensus 4.0%; the report also indicated price and wage pressures were increasing. On Thursday Chicago PMI came in at 55.6 vs. consensus 50.5, and on Friday the ISM Manufacturing Index was 53.1 vs. consensus 50.7. As with the durable goods orders report, the Dallas Fed survey, Chicago PMI and Friday's ISM report all showed strong growth in new orders.

Monday also saw the release of the pending home sales index, which showed a fairly sharp drop off at -4.3% vs. consensus -0.3. However, the drop off was driven by a shortage of lower priced homes, and while this suggests a tougher road for the housing market it could be an overall positive for the economy as appreciating housing prices create a "wealth effect" for existing home owners. Appreciating home prices were confirmed on Tuesday when the Case-Shiller home price index (HPI) indicated a M/M increase of 0.6%, and a Y/Y increase of 5.5%, the highest rate of increase since the 2006 bubble. However, this combined with the

Tuesday's consumer confidence reading missed badly at 58.6 vs. a consensus of 65.1, and marked the second consecutive month of sharp decline (Nov. - 71.5, Dec. - 65.1, Jan. - 58.6). While some of the decline may be attributed to the averted debt ceiling debate, it likely also reflects the burden of consumer's recently increased tax load. However, the report was contradicted by Friday's consumer sentiment report which read 73.8 vs. a consensus expectation of 71.5.

Wednesday delivered a weak Q4 GDP report which came in  below expectations at -0.1% vs. consensus of +1.0%, the first negative reading since 2009. The main determinants of the miss were a pullback in private inventories and a reduction in Federal Government spending. Increases in personal consumption expenditures and private fixed investment suggested the weakness would be temporary, and Wednesday's Fed announcement  stated economic activity had "paused" due to weather and "other transitory factors".

The ADP employment report was also released Wednesday and indicated a 192K  gain in private employment, 20K above the consensus number. While representing only an incremental gain it nonetheless marked the sixth consecutive month of improvement. Friday's employment report showed a 157K gain vs. 175K consensus, but November and December were revised 86K and 41K higher respectively indicating job growth has been stronger than previously thought.

Among companies reporting earnings last week winners included Valero Energy +17.9%, Hess +16.1%, Skyworks +15.1%, CVR Refining +13.3%, Core Laboratories +13.1%, and Fortinet +13.1%. The biggest losers among this same subgroup were Liquidity Services -20.5%, VM Ware -20.1%, Fusion-Io -18.8%, Elizabeth Arden -15.1% and Cabot Corp. -14.3%.

This week sees reports from 324 companies including building suppliers Louisiana Pacific, USG, and Eagle Materials. In autos Delphi Automotive reports, along with Toyota and Cummins. Internet sector companies LinkedIn, Akami and Baidu all report, as well as software providers Cerner, Nuance and Ultimate Software Group. Other companies reporting include IXIA, Trimble, Opentable, Fleetcor, Visa, Shutterfly, Transdigm, Agrium, Chipotle, Panera and Team Health Holdings.







 

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
6
4
10
11
9
# in the bottom 50 groups (out of 197)
8
8
10
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)
6
10
6
6
5
2
# in the bottom 50 groups (out of 197)
9
9
10
8
5
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)
7
5
9
6
3
4
# in the bottom 50 groups (out of 197)
3
6
4
12
12
11

This week there were no clear patterns of rotation between the three different industry group themes. Performance of the defensively oriented groups is tame.


Industry Group Performance:

Energy: Last week's analysis noted the strength in the Oil&Gas-Drilling group (G1381), Oil&Gas-Field Services group (G1380), and Oil&Gas-Refining/Mktg group (G2900) groups.

This past week the Oil&Gas-Refining/Mktg group (G2900) group gained 4.9% to rank #2 on the 1 week price performance list. 25% of the group reported earnings last week and investors responded bullishly. The table below lists those companies from the group that reported earnings last week, and ranks their weekly price performance against all the other 377 companies reporting; green highlighting indicates performance in the top quartile. Obviously investors liked what they heard from these firms.


Symbol
Name
Industry Name
Weekly Gain
Rank
VLO
Valero Energy Corp
Oil&Gas-Refining/Mktg
17.9%
1
MPC
Marathon Petroleum
Oil&Gas-Refining/Mktg
11.4%
11
PSX
Phillips 66
Oil&Gas-Refining/Mktg
10.7%
13
APU
Amerigas Partners Lp
Oil&Gas-Refining/Mktg
5.4%
53
UGI
U G I Corp Hldg Co
Oil&Gas-Refining/Mktg
3.8%
84
NS
Nustar Energy Lp
Oil&Gas-Refining/Mktg
2.7%
116
NSH
Nustar Gp Holdings Llc
Oil&Gas-Refining/Mktg
2.1%
135


Inergy LP (NRGY) is part of the Oil&Gas-Refining/Mktg group, and is scheduled to release earnings Tuesday, 2/5/13, BMO. NRGY has formed a cup & handle pattern with a 20.43 pivot. ROE 51%, yield 5.7%.


Hornbeck Offshore Services (HOS) looks interesting here at current levels, breaking higher out of an ascending triangle. Accumulation is heavy with an accumulation/distribution ranking of "B+", 50 day up/down volume ratio of 1.6, and a 25 day ratio of 1.7. FY '13 EPS are forecast +104%. HOS announces earnings Wednesday 2/6/13 AMC, with the conference call scheduled 9 AM Thursday morning. 




On Friday Pacific Drilling (PACD) was mentioned in a Seeking Alpha blog post as a potential takeover target of Seadrill (SDRL). While this blog is not endorsing the content of the Seeking Alpha blog post, PACD gained 2.2% on 4x average volume, and SDRL closed near the top of its daily range in volume 82% above average. PACD is 1% past its pivot out of a cup & handle, but as always perform your own due diligence...



Healthcare: The Medical-Ethical Drugs group (G2830) has been an average performer with a MarketSmith industry group rank of #112. That could be changing as the group has begun to show strength on the shorter term price performance lists, ranking #16 over the trailing week with a 2.9% gain, and #9 over the trailing 5 weeks with a 14.8% pickup.

Jazz Pharmaceuticals has a 57.99 pivot out of 16 week cup & handle base. JAZZ trades at 13x earnings, with FY '12 EPS forecast +34%, and FY '13 +20%. JAZZ is also seeing accumulation with an accumulation/distribution rating of "A-", and institutional sponsorship increases of 353 > 379 > 417 > 419 over the trailing 4 quarters. The 50 day up/down volume ratio is flat at 1.0, but the 25 day ratio is 1.3. SMR "A", ROE 148%.


Bristol-Myers Squibb (BMY) is 2% past its pivot out of a 28 week consolidation. BMY is seeing strong accumulation with an accumulation/distribution rating of "B+" and a 50 day up/down volume ratio of 2.5


Software: The Computer Sftwr-Gaming industry group ranks #27 on the trailing 5 week price performance list with a 12.6% gain, and over the same period of time has jumped from #152 to #56 in MarketSmith's industry group rankings.

Sohu.com (SOHU) looks attractive on a breakout from this short 5 week consolidation, buy point ~ 50.70. SOHU has an accumulation/distribution rating of "A-" and a 50 day up/down volume ratio of 2.2. SOHU trades at 15x earnings, and FY '13 EPS are forecast +41%, ROE 21%. SOHU is a Chinese ADR and as such comes with a unique set of risks; perform your due diligence.


Finance: 6 of the 8 finance related groups finished in the top 50 of the 1 week price performance list, and 5 of the groups rank in the top 50 of the 5 week list. The Financial Svcs-Specialty group (G6412) ranks #50 on the trailing 5 week price performance list with an 11.2% gain, and over the same period of time has jumped from #126 to #84 in MarketSmith's industry group rankings.

Performant Financial (PFMT) is a recent IPO under heavy accumulation.  PFMT has an "A-" accumulation/distribution rating and the 50 day up/down volume ratio is 3.2, RS is at a new high. FY '12 EPS are forecast +113%, FY '13 +18%. Currently PFMT is 6% past its pivot, but watch to see if it pulls back into the 5% buy zone.



Follow up: Michael Kors (KORS) was listed here several weeks ago with a $54 buy point out of a descending trend line break. On Monday it gapped up over a more traditional 58.62 pivot out of a consolidation and was met with prompt selling, falling back below the pivot within the first 5 minutes. KORS has closed near the bottom of its daily range for the past 3 days, and appears to be waiting for earnings due 2/12.

Shutterfly (SFLY) was highlighted here two weeks ago and has maintained is tight trading channel since that time. The Bollinger Bands have tightened dramatically setting up a volatility squeeze. Accumulation remains heavy with a 50 day up/down volume ratio of 1.8, and a 25 day ratio of 3.1. SFLY releases earnings Tuesday, with the conference call scheduled for 5 PM.

Ocwen Financial (OCN) and Nationstar Mortgage (NSM) still look attractive here.

 


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