Sunday, September 22, 2013

Sector & Group Rotation Notes – 9/22/13



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.

Index
1 Week Gain
2 Week Gain
3 Week Gain
5 Week Gain
13 Week Gain
26 Week Gain
Philadelphia Housing Index
2.9%
7.1%
9.5%
6.8%
3.8%
-5.3%
Philadelphia Semiconductor Index
1.0%
3.8%
7.7%
6.6%
7.0%
14.7%
Pboe Oil Service Index
0.7%
2.1%
6.4%
5.1%
8.7%
14.0%
Dow Jones Transportation Index
2.6%
5.0%
7.1%
5.0%
9.5%
8.3%
Nasdaq Composite
1.4%
3.1%
5.1%
4.8%
12.4%
16.3%
Russell 2000
1.8%
4.2%
6.1%
4.7%
11.3%
13.4%
Russell 1000 Energy Index
0.7%
2.0%
3.5%
3.8%
7.1%
6.1%
S&P 500
1.3%
3.3%
4.7%
3.3%
7.4%
9.8%
DJIA
0.5%
3.5%
4.3%
2.5%
4.4%
6.5%
Philadelphia Utility Index
1.8%
2.4%
1.5%
1.1%
1.9%
-2.7%
Cboe Technology Index
0.8%
0.7%
2.6%
0.2%
9.2%
4.3%
KBW Large Cap Bank Index
-0.1%
0.7%
2.2%
-1.7%
5.7%
12.3%
Philadelphia Gold/Silver Index
0.1%
-7.0%
-7.4%
-12.4%
4.7%
-30.1%

The markets logged another solid week higher, fueled by the Fed's surprise decision to delay tapering their stimulus. The Russell 2000 gained 1.8% followed by the Nasdaq +1.4%, S&P 500 +1.3%, and DJIA +0.5%. Apple had a wild week, falling as much as 5% before finishing the week +0.5%. Ex-Apple the Nasdaq would have gained 1.55%.

As described in last week's mid-week update interest rate sensitive groups surged higher on Wednesday, only to give back the majority of the gains on Thursday and Friday. The selling was spurred along on Friday after Bloomberg TV aired an interview with St. Louis Fed President James Bullard who described the decision not to move as “borderline.” He also stated “This was a close decision here in September. It’s possible you get some data that can change the complexion for the outlook and make the committee comfortable with a small taper in October.”

A broader view of industry group performance shows a continued absence of defensive rotation, with technology groups outperforming. 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)
7
7
8
7
6
3
# in the bottom 50 groups (out of 197)
8
10
7
6
6
12

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

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

Despite Friday's pullback the view here is the market remains healthy, and traders purchasing growth oriented names will prosper. The Sector Trend blogs tracks a list of 2100 of the most liquid stocks, and the table below shows this list's performance for Friday, and the trailing week and month sorted by RS grouping:


Price Performance
RS
Fri 9/20
9/16 - 9/20
8/26 - 9/20
90 - 99
-0.4
2.8
11.7
80 - 89
-0.6
1.4
5.6
50 - 79
-0.6
1.4
3.8
20 - 49
-0.9
1.2
2.1
1 - 19
-2.1
-0.2
-1.2
Average:
-0.8
1.3
4.0

Note that the strongest stocks, those with RS 90 - 99 gained the most for the week, and gave back the least on Friday. In fact, for both the week and for Friday's pullback there is a perfect correlation between increasing relative strength and increasing performance.

In this case we are using RS as a surrogate for growth, and of course there are times when this will be false. So to further demonstrate the point, the table below examines the trailing price performance of stocks with RS 90 - 99 only, but sorted by EPS tier:


Price Performance for stocks with RS 90 - 99

EPS Tier:
Fri 9/20
9/16 - 9/20
8/26 - 9/20
# of stocks
90 - 99
-0.5
2.9
9.8
57
80 - 89
-0.4
0.7
8.9
19
50 - 79
-0.5
2.7
10.4
67
20 - 49
-0.6
2.8
11.2
66
1 - 19
0.1
4.0
17.9
45
Average:
-0.4
2.8
11.7
254

Among the high relative strength group, those stocks with the lowest EPS rankings, i.e. the most speculative, are performing best. Investors are pursuing growth, and the data presented here suggests they will continue to do so.

The circus in Washington will probably introduce some volatility, and the market needs to work off its overbought condition, so we could see a pause or retracement over the next week or two. However, this is a strong bull market and until the data suggests otherwise, it appears the trend is higher.

Industry Group Performance:

Housing: Despite the give back on Thursday and Friday, housing sector groups still have 5 groups ranked in the top 30 of the trailing 2 week price performance list. The table below shows building related groups price performance over the trailing 2 weeks.



Price Performance

Industry Group
Symbol
1   Week Gain
1   Week Rank
2   Week Gain
2   Week Rank
Ind. Group Rank
Bldg-Constr Prds/Misc
G3299
1.9%
78
12.1%
3
91
Bldg-Resident/Comml
G1520
3.9%
16
9.5%
5
196
Bldg-Mobile/Mfg & Rv
G3791
4.0%
14
7.1%
16
20
Bldg-Wood Prds
G2400
3.4%
23
6.7%
21
194
Bldg-Heavy Construction
G1621
3.6%
19
6.3%
29
153
Chemicals-Paints
G2851
2.4%
51
4.0%
87
147
Bldg-Hand Tools
G3548
0.4%
162
3.9%
90
103
Bldg-Cement/Concrt/Ag
G8074
-0.6%
191
3.7%
100
170
Bldg-A/C & Heating Prds
G3585
1.3%
113
3.4%
114
108


While the sector may continue to see volatility, the strong bounce demonstrated in the table above suggests the bottom is in.

Electronics: Over the past month the Sector Trends blog has documented the increasing strength in electronics related groups, and has highlighted the attractive characteristics of Maxwell Technologies (MXWL).

Unfortunately, this past week MXWL was subject to the incompetence of analysts at Piper Jaffray. Before market open Thursday they upgraded MXWL based on a new subsidy for electric vehicles in China, and MXWL soared 11% to a high of 10.39. They then retracted the upgrade, citing "misinterpretation of data" which caused them to fail to note the subsidy was for plug in hybrids only, a product category MXWL has minimal exposure to. MXWL promptly fell, and closed Friday 2% below Wednesday's close. Although nothing material has changed in MXWL's outlook, the volatility has done some damage to the chart. Don't take it off your list, but it could be a few more weeks.

Software: The Sector Trends blog has been covering the software sector regularly since the March 3rd blog post pointed out the emerging performance of software related groups, writing "Software related groups have been substandard ... however, these group's performance may be starting to turn as... 5 groups rank in the top 42 of the trailing 3 week price performance list."

At the time there wasn't a single software group ranked in the top 100 of MarketSmith's industry group rankings; today there are 7 software related groups ranked in the top 42. As the table below demonstrates, groups from the sector turned in another strong performance last week with 6 groups ranked in the top 40 of the trailing one week price performance list.



Price Performance

Industry Group
Symb.
1 Week Gain
1 Week Rank
Ind. Group Rank
Computer Sftwr-Medical
G3069
8.0%
2
38
Computer Sftwr-Edu/Media
G3357
4.3%
8
18
Comp Sftwr-Spec Enterprs
G2761
4.1%
12
6
Computer Sftwr-Desktop
G3270
3.4%
22
131
Computer Sftwr-Financial
G2821
2.8%
35
71
Computer Sftwr-Database
G3582
2.7%
40
42
Computer Sftwr-Enterprse
G3583
1.7%
88
10
Computer Sftwr-Design
G3575
1.1%
126
126
Computer Sftwr-Security
G3220
1.1%
129
11
Computer Sftwr-Gaming
G3584
-0.2%
185
12

The blog tweeted the Palo Alto Networks (PANW) chart back on September 10th after PANW beat on both earnings and revs and raised guidance. PANW has seen massive weekly volume since, and moved in sympathy this past Friday with the new security IPO FireEye (FEYE) after it gapped open to 40.33 from a $20 offer price. Since September 9th, PANW's A/D rating has gone from "D" to "B", it's 50 day up/down volume ratio has increased from 0.9 to 1.3, and its RS has increased from 12 to 28. On Friday PANW broke through a year-long descending trendline before retreating back to the line at the close. PANW merits close attention here, weekly chart below:



Growth: Last week the blog wrote "investors are looking for growth wherever they can find it. Here are some names that look interesting." And here's how those names did last week:

Symbol
Name
Gain %
AVG
A V G Technologies N.V.
12.7%
BIIB
Biogen Idec Inc
5.7%
VRX
Valeant Pharmaceuticals
5.3%
GNRC
Generac Hldgs Inc
4.7%
SSNC
S S & C Technologies
4.4%
BDBD
Boulder Brands Inc
2.7%
AMBA
Ambarella Inc
0.3%
EDU
New Orientl Edu&Tech Ads
-2.9%

Average Gain:
4.1%

This week's charts are selections from a MarketSmith screen with RS > 90, Price > $20, 50 day average volume > 500K, and A/D of ratings of "A" or "B"; the screen returned 113 names. Price and average volume were set higher to ensure above average liquidity as we go into year end.

Fifth & Pacific (FNP) was featured in the 9/8 analysis and has gained 4.5% in the interim. FNP is in the midst of a 5 week flat base with a 26.11 pivot, and has seen institutional sponsorship increase 274 > 310 > 356 over the past two quarters.


Hanesbrands (HBI) was also featured in the 9/8 blog post and has picked up 3.1%. HBI is showing strong levels of accumulation and has a 65.60 pivot out of a cup shaped base.


Lear Corp. (LEA) is out of the Auto/Truck-Original Eqp group and after 7 quarters of stagnation saw institutional sponsorship jump from 492 funds to 574 over the past quarter. Pivot point 73.72 out of a 6 week flat base.


Rex Energy (REXX) was featured in the March 10 blog post and has gained 55% in the interim. REXX has set up again out of a 6 week flat base with a 22.08 pivot. Sales have ramped +27%, +42%, +40%, +83% over the past 4 quarters. Analysts forecast FY '13 EPS +113%, FY '14 +79%.


Priceline was featured in the June 30 blog post and has gained 21% since. PCLN has based again and has just poked above the $995 pivot out of a 5 week flat base.


Generac (GNRC) was just featured last week when the blog noted "Generac (GNRC) is seeing massive accumulation despite the fact it has been in a descending channel for the past 6 weeks. GNRC has a "A-" A/D rating, 50 day up down volume of 1.5, and a 25 day ratio of 2.1. You read that correctly: as GNRC has been drifting lower over the past 6 weeks, the up/down volume ratio for the last 5 weeks has been 2.1. Institutional sponsorship has exploded 201 > 282 > 317 > 378 over the past 4 quarters suggesting institutions believe that analyst forecasts of an FY '14 EPS decline of 2% are garbage. GNRC looks like a buy with a break higher out of the descending channel seen in the chart below."

On Friday GNRC gained 3.4% in volume 50% above average to break out of what MarketSmith pattern recognition now identifies as a double bottom base. GNRC looks like buy right here.


Valient Pharmaceuticals (VRX) was also featured last week. The blog noted "Valeant Pharmaceuticals (VRX) has a PE of 20 with analysts forecasting FY '13 EPS +36%, and FY '14 EPS +40%. Quarterly sales and EPS results have been explosive, and VRX is seeing some accumulation with a "B" A/D rating and a 50 day up/down volume ratio of 1.5. Institutional sponsorship increased from 985 to 1057 funds over the past  quarter. RS 91, EPS 95, ROE 37%. VRX should present a buying opportunity as the 50 day MA catches up with price, watch for an increase in volume for an early tell."

VRX didn't wait for the 50 day to catch up, but started moving on Monday, helped along by a Goldman "Conviction Buy" rating initiated on Tuesday. Thursday gave the sought for volume confirmation as VRX gained 3.2% in volume 35% above its 50 day average. VRX looks like a buy here.


Celgene (CELG) is a biotech with a solid quarterly sales and earnings increases. CELG is showing strong accumulation with a "B+" A/D rating, 50 day up/down volume ratio of 1.5, and a 25 day ratio of 1.8. CELG looks good right here.


Theravance (THRX) is a biotech yet to turn a profit, and sales last quarter were a puny $1.3M. Regardless, the THRX chart shows massive accumulation with an "A" A/D rating, and while the 50 day up/down volume ratio is an average 1.0, the 25 day ratio of 2.4 indicates very strong short term accumulation. This chart is shown with zero knowledge of the merits of THRX's product or research, and as with every stock the reader needs to perform their own due diligence.


Shutterfly (SFLY) was featured in both the Jan. 20 and Feb 3 blog posts, and is up 73% since the Feb. 3 post. SFLY has set up again in a second stage cup with handle base with a 58.53 pivot. A/D "B", 50 day up/down volume 0.9, but the 25 day ratio is a stronger 1.4. There's not nearly as much accumulation in this set up as back in January, so insist on very strong volume on any breakout, otherwise give it a pass.


Spirit Airlines (SAVE) is seeing massive accumulation in heavy volume as it climbs the right side of its cup shaped pattern. A/D "B", 50 day up/down volume ratio 1.5, with a 25 day ratio of 2.7. Institutional sponsorship stagnated at ~ 300 funds for 3 quarters before jumping to 347 this last quarter. Analyst EPS estimates +52% FY '13, +21% FY '14; PE 20.



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