Sunday, November 3, 2013

Sector & Group Rotation Notes – 11/3/13



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. The preponderance of red found in the table below over the trailing 1-5 week time period illustrates how the market is narrowing.

Index
1 Week Gain
2 Week Gain
3 Week Gain
5 Week Gain
13 Week Gain
26 Week Gain
Dow Jones Transportation Index
0.6%
3.2%
6.0%
6.8%
6.0%
13.3%
Pboe Oil Service Index
0.2%
-1.6%
1.7%
4.3%
6.1%
10.9%
Philadelphia Utility Index
-0.4%
1.4%
2.1%
4.2%
-1.5%
-5.7%
S&P 500
0.1%
1.0%
3.4%
4.1%
3.0%
9.1%
Nasdaq Composite
-0.5%
0.2%
3.4%
3.7%
6.3%
16.1%
Russell 1000 Energy Index
-0.4%
0.6%
2.2%
3.1%
3.3%
7.8%
KBW Large Cap Bank Index
-0.8%
-1.8%
1.2%
3.1%
-3.9%
13.0%
Philadelphia Semiconductor Index
1.8%
-0.2%
1.6%
3.0%
4.6%
12.1%
Cboe Technology Index
0.0%
0.9%
1.4%
2.6%
4.4%
8.4%
DJIA
0.3%
1.4%
2.5%
2.3%
-0.3%
4.3%
Russell 2000
-2.0%
-1.7%
1.0%
2.0%
3.4%
14.8%
Philadelphia Housing Index
-3.3%
0.9%
2.2%
0.8%
0.5%
-8.4%
Philadelphia Gold/Silver Index
-7.7%
-0.1%
6.1%
-1.8%
-2.3%
-14.5%

Last week the markets churned in above average volume as the S&P 500 picked up two distribution days and the Nasdaq one. For the week the DJIA gained 0.3% and the S&P 500 0.1%, while the Nasdaq fell -0.5% and the Russell 2000 crumbled -2%. Weekly volume on the Nasdaq was 17% above average even edging out last week's elevated volume, and weekly volume on the S&P 500 was 11% above average, its highest level in 6 weeks.

The action in the Russell 2000 was especially ominous given the volume signature of the selling. The Russell 2000 hit a new all time high on Tuesday, a 46.9% gain from the November 2012 low. It then promptly rolled over falling 2.36% over the next 3 days in volume 27% above average, suggesting very heavy institutional selling.


 

Last week's analysis pointed out the underperformance of high relative strength stocks, and the outperformance of those paying a dividend. The matrix below looks at the trailing 1 month performance of stocks sorted by market cap and dividend payment, and was pulled from a list of 3,398 stocks (ETFs excluded, avg. daily volume > 30K, price > $3, market cap > $100M). Note the perfect correlation both across market cap categories for larger cap stocks, and within market cap categories for dividend paying equities.



Performance 1 Month



Dividend



Yes
No
Both
# stocks
Market Cap
Large Cap
3.7
2.3
3.5
573
Mid Cap
3.3
1.4
2.6
985
Small Cap
2.4
-0.2
0.9
1441
Micro Cap
-0.6
-1.0
-0.9
399

This table takes a closer look at the 1 month performance of large cap dividend paying stocks sorted by industry group relative strength. Stocks in stronger groups are outperforming.

Large Cap Dividend Paying Stocks

Industry Group RS:
Gain %
# Stocks
A
4.4
92
B
3.8
102
C
3.8
103
D
3.3
126
E
3.1
51

This table looks at the same group of large cap dividend paying stocks but sorts the performance by forecasted FY '14 EPS growth. Stocks with FY '14 EPS forecast > 0 are outperforming.

Large Cap Dividend Paying Stocks

EPS Forecast FY  '14
Gain %
# Stocks
20 - 50%
3.7
83
10 - 20%
4.0
176
0 - 10%
3.7
148
< 0
2.6
47

Last week's analysis detailed the underperformance of high RS (relative strength) stocks and that abated this past week, but only because the composition of the high RS stocks has changed. The two sets of data in the table below show the weekly performance of 2,080 liquid stocks tracked by the Sector Trends blog. The data on the left sorts the stocks by their RS rank as of 11/1, the data on the right measures the same 2,080 stocks over the same trailing 1 week period, but sorts by their RS rank as of 10/5. The high RS stocks of a few weeks ago are still getting hit hard.

RS Rank as of  11/1/13
Weekly Performance

RS Rank as of 10/5/13
Weekly Performance
90 - 99
-0.20

90 - 99
-2.47
80 - 89
-0.11

80 - 89
-0.72
50 - 79
-0.73

50 - 79
-0.53
20 - 49
-1.54

20 - 49
-1.24
1 - 19
-4.16

1 - 19
-2.38
Grand Total
-1.21

Grand Total
-1.21

Economic data for the week was solid. On Monday industrial production topped expectations with a M/M increase of 0.6% vs. an expectation of 0.4%, although this appeared to be a result of cooler weather boosting demand for utilities.  On Tuesday retail sales missed slightly at -0.1% vs. a consensus of 0.0%. Wednesday's FOMC meeting left guidance unchanged, and the Fed continued to indicate monetary policy would remain accommodative for an extended period of time after asset purchases end. Thursday's Chicago PMI was an excellent 65.9 vs. consensus of 55.0, its strongest reading in more than two and a half years. Friday's PMI reading of 51.8 for October was the slowest final monthly rate in over a year, although the ISM Manufacturing Index reading of 56.4 exceeded the consensus expectation of 55.0.

Over 1700 companies reported last week, and top gainers included Carbo Ceramics +22.3%, Dreamworks +20.4%, Expedia +19.2%, Buffalo Wild Wings +14.1%, and Trimble +13.9%. Over 1200 companies report next week including Disney, Qualcomm, Priceline, Time Warner, CBS, Solar City, Tesla, Ubiquiti, Bitauto, YY, Acadia, Soufun, and Wageworks.

A broader look at industry group performance shows technology oriented groups performing poorly over the trailing 1, 2, 3 and 5 week time periods, while at the same time defensively oriented groups have ticked higher. 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
6
4
7
9
5
# in the bottom 50 groups (out of 197)
7
14
9
7
6
10

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
2
4
5
7
11
# in the bottom 50 groups (out of 197)
11
13
16
16
6
6

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

Summary: Last week in this space the blog wrote "if the market starts picking up distribution days - and it probably will - do not ignore them". As we know the market picked up 3 last week, and that would have been 5 if you want to throw in the Russell 2000. While it remains unknown whether the market will correct or just consolidate, caution is strongly advised. The high volume churning and selling in the indexes, combined with the rush towards large cap dividend paying stocks and the defensive tilt of recent industry group price performance all suggest a market that will at least struggle, if not pull back or correct. Regardless of what happens, it's important to remember that the capitalization weighted aspect of the indexes will cause them to understate the damage done to the average stock.

Industry Group Performance:

Software: Two weeks ago the October 20 Sector Trends wrote that the "March 3rd blog post pointed out the emerging performance of software related groups, at a time when not a single software group was ranked in the top 100 of MarketSmith's industry group rankings...today there are 7 software groups ranked in the top 60 of MarketSmith's rankings. Unfortunately all good things must end, and it appears this move is running out of steam."

Today there are only 3 software related groups left in the top 60 of MarketSmith's rankings, and 8 of the 10 groups rank in the bottom 50 of all 197 groups on the trailing 5 week price performance list. The move in these groups appears over.

Retail: Retail related groups had a decent week with 8 groups in the top 50 of the trailing 1 week price performance list vs. only 2 in the bottom 50. However, 2 of the top 3 performing groups were the defensively oriented Retail-Major Disc Chains group, +4.3% (#5 for the week), and the Retail-Drug Stores group, +2.1% (#14). The Retail-Internet group was the weakest, -4.3% (#190).

Steel: The Steel-Producers group is on a tear ranking #2 on the trailing 1 week price performance list with a 5% gain, #5 on the trailing 3 week list with a 9.5% gain, and #4 on the trailing 5 week list with a 12.0% gain. Over the trailing 5 weeks the group's MarketSmith industry group rank has improved +55 to #71 overall.

Medical/Healthcare: The October 20 blog post highlighted the improving performance of Medical oriented industry groups; and that continued this past week with 6 groups ranked in the 50 of the trailing 1 week price performance list vs. only 2 ranked in the bottom 50. Two weeks ago there were only 3 medical related groups in the top 50 of MarketSmith's industry group rankings, today there are 6.

Energy: With the exception of solar, energy related groups have started to underperform over the short term. On the trailing 2 week price performance list  9 of 13 energy related groups rank in the bottom 50, versus only 1 (solar) in the top 50. The Oil&Gas-U S Expl&Prod group ranks #10 on the 13 week price performance list with a 13.9% gain, but ranks #183 on the trailing 2 week list with a -4.1% loss. A number of high RS fracking names took losses last week including Matador Resources (MTDR) -5.8%, Goodrich Petroleum (GDP) -11.3%, Diamondback Energy (FANG) -5.0%, Magnum Hunter (MHR) -8.1%, and Carrizzo (CRZO) -4.0%.

Autos: Automobile related groups have had a huge run but are starting to roll over. The Auto Manufacturers group remains highly ranked with a MarketSmith industry group rank of #3, but ranks #196 on the trailing 5 week price performance list with a -11.9% loss. Last week losses in the 5 related groups ranged from -1.7% to -5.6%, and 4 of the 5 groups finished in the bottom 50 of the trailing 1 week price performance list. Over the past 3 weeks the auto related groups have declined an average of -17 in MarketSmith's industry group rankings.

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