Sunday, October 27, 2013

Sector & Group Rotation Notes – 10/27/13



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.

Index
1   Week Gain
2   Week Gain
3   Week Gain
5   Week Gain
13 Week Gain
26 Week Gain
Dow Jones Transportation Index
2.6%
5.4%
6.0%
4.7%
8.3%
14.6%
Nasdaq Composite
0.7%
4.0%
3.6%
4.5%
9.1%
20.3%
Russell 2000
0.3%
3.1%
3.7%
4.2%
6.7%
19.6%
Philadelphia Gold/Silver Index
8.2%
15.0%
10.4%
4.1%
-1.1%
-6.2%
Philadelphia Utility Index
1.8%
2.5%
5.3%
4.0%
-0.8%
-5.7%
Pboe Oil Service Index
-1.8%
1.5%
1.6%
3.7%
7.8%
15.0%
Philadelphia Housing Index
4.3%
5.7%
6.2%
3.1%
6.8%
-2.7%
Cboe Technology Index
0.8%
1.3%
2.5%
3.1%
6.7%
14.1%
S&P 500
0.9%
3.3%
4.1%
2.9%
4.0%
11.2%
Russell 1000 Energy Index
1.0%
2.6%
3.2%
2.9%
3.8%
11.3%
KBW Large Cap Bank Index
-1.0%
2.0%
3.0%
2.0%
-1.7%
14.6%
DJIA
1.1%
2.2%
3.3%
0.8%
0.1%
5.8%
Philadelphia Semiconductor Index
-2.0%
-0.2%
-0.3%
0.6%
4.9%
12.8%

Late Tuesday evening 10/22 the blog tweeted the "character of the market is changing, high RS stocks lagging, low RS stocks leading, nascent signs of defensive rotation. Not good signs." The market did indeed change character last week, and not for the better. On first glance it would appear everything is hunky-dory as all of the major broad based market indexes posted gains for the week: DJIA +1.1%, S&P 500 +0.9%, Nasdaq +0.7%, and Russell 2000 +0.3%. Unfortunately, that's not the case. Turkeys started flying last week, and that's usually not a good thing.

One market negative last week was the underperformance of the Nasdaq and Russell 2000. Over the trailing 13 week period the Nasdaq's performance is more than double that of the S&P 500, and the Russell 2000 has beaten the S&P by 67% over the same time period. But that is changing, as over the trailing 3 weeks the S&P 500 now leads, +4.1% vs. +3.6% for the Nasdaq and +3.7% for the Russell 2000. The market always performs best when the Nasdaq is outperforming the S&P 500.

A second negative is that the Nasdaq stalled last week.  Although technically the index gained 0.7%, this was due to the performance of only 3 of its most heavily weighted stocks; if you back out the performance of AAPL, MSFT, and AMZN the Nasdaq Composite gained only 0.05% last week. Combine this with its heaviest weekly volume in over 8 months, occurring in a week without options expiration, and you have what looks like an index stalling out.

Previous Sector Trends blog posts have described how growth stocks have been powering the market higher, and how those stocks with the highest RS (Relative Strength) rated 90 and above have been leading.  This leadership was pounded last week as investors and institutions sold the high RS names en masse. The Sector Trends blog tracks 2,100 of the market’s most liquid stocks and the table below shows their performance for the week by RS tier. Note the perfectly inverse performance correlation for the week - the stocks which have been leading performed worst, while the stocks which have been lagging performed best:
                       
RS Tier:
Performance Week Ending 10/25
# of Stocks
90 - 99
-1.6
233.0
80 - 89
-0.3
291.0
50 - 79
0.9
743.0
20 - 49
1.0
539.0
1 - 19
1.5
275.0
Total
0.6
2081.0

The inverse correlation exists even when you back out the battered China names, although the drawdown in the 90 - 99 tier decreases to -1.1%.

A closer examination of the data suggests the market is rotating from growth back to income. The table below examines the performance of those same 2100 liquid names sorted by their yield as of 8/24/13. The table breaks out the performance first by the trailing three week period, and compares it to the 5 week period which preceded it. The table clearly shows the reversal of fortunes between dividend and non-dividend stocks over the two time periods.

Yield:
3 Week Perf.            9/30 - 10/25
5 Week Perf.             8/26 - 9/27
# of stocks
8%+
4.3
1.8
108
5 - 8%
5.2
0.9
128
3 - 5%
4.5
0.9
280
1 - 3%
4.1
2.2
614
0.1 - 1%
3.7
4.9
153
0
1.3
5.5
798
Total:
3.1
3.4
2081

One bright spot for the week was the performance of the transports, the Dow Jones Transportation Index finished the week at an all time high and 5 of the 7 transportation related industry groups finished the week in the top 50 of the trailing 1 week price performance list. This performance suggests investors and institutions foresee an improvement in the economy, and suggests any forthcoming market weakness would imply a period of consolidation versus correction.

Last week 793 companies reported quarterly earnings results including Apollo Group +30.8%, Federal-Mogul +26.3%, Agnico Eagle Mines +23.6, Generac +22.5%, I T T Educational Svcs +21.5%, Corelogic +19%, Deckers +17.6%, and Alexion Pharmaceuticals +15.4%. Next week 1,723 companies report including Yelp, Ligand Pharmaceuticals, Questcor, Facebook, Sinclair Broadcast Group, TASER, Fleetcor, Webmd, P G T Inc and numerous others.

A broader look at industry group performance shows technology oriented groups performing poorly over the trailing 1, 2, 3 and 5 week time periods. Commodity oriented groups are also performed poorly with  only one energy group cracking the top 65 in price performance last week, the Oil&Gas-Transprt/Pipelne group, an industry group known for its generous dividend yields. Defensively oriented groups finished the week in a neutral distribution across the 197 groups, but at times during the week they led the market higher; and the week finished with 3 utility groups ranked in the top 38 overall . 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
4
4
6
7
5
# in the bottom 50 groups (out of 197)
12
10
9
8
7
9

28 Technology Oriented Groups:
1 wk
2 wk
3 wk
5 wk
13 wk
26 wk
# in the top 50 groups (out of 197)
3
4
4
6
9
11
# in the bottom 50 groups (out of 197)
13
16
16
12
6
5

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
7
13
8
2
3
# in the bottom 50 groups (out of 197)
7
7
9
8
13
12

Summary: The Nasdaq has gained over 40% in slightly less than a year, and closed Friday at a 13 year high. Unfortunately, the stalling behavior, rotation towards income, evisceration of high relative strength stocks, and nascent signs of defensive rotation all suggest the run is close to its end. Over the past 3-4 months this blog has been correctly dismissive of distribution days and the resultant "market in correction" calls. But the environment changed dramatically last week, and if the market starts picking up distribution days - and it probably will - do not ignore them. Whether the market corrects or just consolidates is unknown; but caution is strongly advised - especially for those with investments in high relative strength growth stocks.



Industry Group Performance:

China: The Sector Trends blog has pointed out the strength in China stocks over the past month, and did so again in last week end's analysis. Chinese names took a 1-2 punch last week when first on Wednesday China's central Bank let interest rates increase to their highest level in 3 months. This was followed by a report on NQ Mobile by short seller Carson Block on Thursday accusing NQ of fraud.

NQ fell 57% on the week, and selling in other China based names was heavy; with the average liquid Chinese ADR (not including NQ) down 5.2% for the week. The vast majority of the damage was contained to ADRs that started the  week in the 90 - 99 RS tier, these 17 names on average fell 7.7%. The 9 liquid China based ADRs that started the week with RS < 90 averaged a decline of only 0.7% for the week, with CSIQ, EDU, NTES and WX still posting weekly gains.

Regardless of the veracity of Carson Block's fraud claims, the odds of further short term appreciation from this group appear slim.

Food: The September 1 blog post pointed out the weakness in food related groups due to concerns over US crop production. The industry group ranks remain poor, with the highest ranked group coming in at #138. However, as the table below demonstrates, the short term price performance of these defensively oriented groups has improved dramatically:


Price Performance

MarketSmith
Industry Group
3 Week Gain
3 Week Rank

Ind. Group Rank
Food-Dairy Products
11.8%
3

149
Food-Misc Preparation
6.4%
32

147
Food-Grain & Related
6.7%
25

138
Food-Confectionery
6.2%
35

177
Food-Packaged
4.8%
69

164
Beverages-Non-Alcoholic
5.9%
42

190
Food-Meat Products
1.5%
155

170

Boulder Brands (BDBD) remains in the volatility squeeze highlighted in the 8/4 and 9/15 blog posts. It is not showing signs of strong accumulation, but that could change over the coming weeks. Strengths: RS 85, EPS 94, analyst EPS forecasts +55% FY '13 and +48% FY '14, and the Bollinger Bands remain in a  volatility squeeze. Weaknesses: Institutional sponsorship has been stagnant, ROE only 4%. Price alert ~ 16.77.



Charts: The following charts come from a MarketSmith screen with the following parameters:



CBOE Holdings (CBOE) is seeing significant accumulation with a "B+" A/D rating, 50 day up/down volume ratio of 1.3, and a 25 day ratio of 1.5. CBOE yields 1.4%, and has a 51.12 pivot out of a cup shaped base.



Eaton Vance (EV) is seeing heavy accumulation. A/D rating of "B+", 50 day up/down volume ratio 1.4, 25 day ratio 1.5, yield 2.1%. Analysts forecast FY '13 EPS +12%, FY '14 +19%.



Flowers Foods (FLO) is seeing accumulation: A/D rating "A-", 50 day up/down volume ratio 1.5, 25 day ratio 1.7, yield 1.8%. Analysts forecast FY '13 EPS +41%, FY '14 +13%.



Lazard (LAZ) could have potential. A/D rating "A", 50 day up/down volume ratio 1.2, 25 day ratio 1.0, yield 2.5%. Analysts forecast FY '13 EPS +23%, FY '14 +34%.



LPL Financial (LPLA) is another investment banker showing potential. A/D rating "A-", 50 day up/down volume ratio 2.2, 25 day ratio 3.3, yield 1.9%. Analysts forecast FY '13 EPS +14%, FY '14 +11%. Note the increase in institutional sponsorship in the weekly chart below.



RLJ Lodging Trust is a hotel REIT that's breaking out. A/D rating "A-", 50 day up/down volume ratio 1.5, 25 day ratio 2.3, yield 3.2%. Analysts forecast FY '13 EPS +19%, FY '14 +14%. Note the increase in institutional sponsorship in the weekly chart below.



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