Sunday, January 12, 2014

Sector/Group Rotation Notes - 1/12/14

Last week the major market indices logged solid gains as the Nasdaq gained 1.0%, followed by the Russell 2000 +0.7%, the S&P 500 +0.6%, while the DJIA fell -0.2%. Over the trailing 5 weeks the Russell 2000 leads with a 2.9% gain, followed by the Nasdaq +2.8%, DJIA +2.6%, and S&P 500 +2.1%. The leading performance of the Nasdaq & Russell 2000 suggests continued investor appetite for growth oriented equities and bodes well for the continued health of the market.

However, this mild weekly performance masks an incredibly strong week from select sectors of the market. Last week the Medical sector exploded higher in very strong volume, by the bog's calculation gaining 8.3% (un-weighted average) for the week. This was followed by the internet sector +3.9%, aerospace +2.5%, and autos +2.3%. If you take a slightly longer view and consider the trailing month the strongest sectors are internet, medical, software, building, and media. Over the same time period the weakest sectors are retail, energy, metals, mining, and insurance.

Economic data continued to reflect an improving economy. Factory orders grew 1.8% exceeding the 1.6% consensus, but the ISM non-manufacturing index missed slightly at 53.0, vs. 54.8 expected. International trade figures released Tuesday showed a narrowing trade gap, suggesting stronger 4th quarter GDP. Wednesday's ADP employment report was very strong indicating private payroll growth of 238K vs. an expected level of 205K, and Thursday's jobless claims number for the previous week came in 15K less than the trailing 4 week average. Friday's employment numbers missed badly but were contradicted by the strong ADP numbers released Wednesday, suggesting these numbers could be an aberration.

Technology oriented industry groups continued the relative out-performance mentioned in last week's analysis with 11 groups in the top 50 of the trailing week's price performance vs. only 3 in the bottom 50. Defensively oriented groups also saw a pickup with 13 groups in the top 50, but out of these 13 groups 9 were from the medical sector, and the aggressive nature of this move suggests it was something much more, and much different, than a shifting of assets into a defensive allocation.

Summary: The indexes are basically static as they work off an overbought condition, picking up the occasional distribution day as this happens. Don't be fooled by this action, this market is very strong with serious money being made in the right sectors and names.


Industry Group Performance:

Medical: As described above the medical sector exploded last week with strong gains across almost all industry groups within the sector. The table below shows the trailing week's price and volume performance, as well as MarketSmith industry group rank, and the 1 week change (Δ) of the rank. This massive move, and the strong volume that accompanied it, suggests further gains upcoming for the sector.

Trailing 1 Week Price Performance

Industry Group
1 Week Gain
1 Week Rank
% to Average Volume

Industry Group Rank
1 Week Δ


Medical-Generic Drugs

Medical-Whlsle Drg/Suppl

Medical-Research Eqp/Svc

Medical-Ethical Drugs





Medical-Outpnt/Hm Care


Medical-Managed Care

Medical-Long-Term Care


Stemline Therapeutics (STML) has endured a steep sell off and it's currently 55% off its 52 week high. STML is beginning to find some buyers at this level, and while the 50 day up/down volume ratio is only 0.7, the 25 day ratio has picked up to 1.0. STML also enjoys an "A" sponsorship rating meaning it is owned by the best performing mutual funds (out of 271 biotech stocks only 41 have an "A" sponsor rating); and it's interesting to note that during its 4th quarter 55% pullback fund sponsorship actually increased from 116 to 119. Volume on Thursday and Friday was 41% above its 50 day average, and STML is just beginning to emerge from a volatility squeeze.

This TC2000 chart shows the Bollinger Band volatility squeeze:

Xenoport (XNPT) is under heavy accumulation, with an "A+" A/D rank, 50 day up/down volume of 1.6, and 25 day up/down of 3.3. XNPT also enjoys an "A" sponsorship rank. XNPT is 1% past a 6.50 pivot out of a cup shaped base.

Clovis Oncology (CLVS) jumped 22% last week and will probably be at $80 in short order. A/D is "B+" and the sponsorship rank is "A".

Cambrex (CBM) jumped 8% last week to recapture its 50 day MA. CBM enjoys a "B+" A/D rank and 50 day up/down volume of 1.2. FY '14 EPS are forecast to increase 28% to 1.06. CBM has an "A" sponsorship rating.

Karyopharm (KPTI) is a recent IPO that has set up a flag pattern on the weekly chart. A/D is "A+", 50 day up/down volume 3.5, sponsorship rating "A".

ICON plc (ICLR) looks attractive here. A/D is "A-" with a 50 day up/down volume ratio of only 0.9 but a 25 day ratio of 1.7 reflecting the accumulation of the past 5 weeks. FY '13 EPS estimates are forecast +56%, FY '14 +20%.

Cadence Pharmaceuticals (CADX) looks a little extended here but is seeing huge accumulation: the 50 day average volume has increased from ~ 350K in the middle of November to 930K now. A/D is "A" with a 50 day up/down volume ratio of 3.3. CADX sales have increased 192%, 195%, 122%, and 108% over the trailing 4 quarters.

Internet: Last week was another strong week for the Internet sector as the Internet-Content group gained 3.4% (#16) and the Internet-Network Solutions picked up +2.5% (#28).

The Internet-Content group has owned a MarketSmith industry group rank in the top 40 since last April, and has had a top 10 rank for the last 23 weeks, so its continued performance is not a surprise.

The Internet-Network Solutions group is a different story, over the past 5 weeks it has gained 8.5% to rank #19 among all groups, and has jumped +20 in MarketSmith's industry group ranks to #148 overall.

Solarwinds (SWI) is under accumulation is getting started on the right side of what will likely evolve into a cup shaped pattern.  A/D "B+", ROE 32%, SMR "A", 50 day up/down volume 1.6, 25 day 2.3. SWI might base around this $40 level for a bit before moving higher.

Gigamon (GIMO) was featured in last week's blog and finished the week -0.3% despite some mid-week excitement. Regardless, a repeat of last week's commentary is merited: GIMO "appears ready to begin work on what could be the right side of a cup shaped pattern. GIMO's last 4 quarters have seen +40% sales growth and it has an "A" sponsorship rating and has seen institutional sponsorship increase 53 > 72 > 95 over the past 3 quarters. Pacific Crest, a securities firm whose research focuses on high growth sectors in technology, is bullish on the stock stating it has a number of positive catalysts that could enable it to "sustain hypergrowth."

Building: Although this sector only enjoys one group ranked in the top 50 of MarketSmith's industry group rankings, it has 5 groups ranked in the top 50 of the trailing 5 week price performance list with gains ranging from +5.6% to +10.5%. Over the same 5 week period the Philadelphia Housing Index has gained 9.4%.

PGT Inc. (PGTI) was highlighted last week and gained 4.2% on the week, and has picked up 10.9% since the blog tweeted the set up Jan. 2. PGTI is just 1% past an 11.19 pivot out of a 15 week consolidation.

Headwaters (HW) was featured in the blog 2 weeks back and has gained 4.6% since, it looks headed higher.

Boise Cascade (BCC) is seeing volume dry up in this handle-like 3-weeks tight pattern. Wait for a move over 30.50 in strong volume.

Standard & Pacific (SPF) is another repeat, up 5% since being highlighted in the blog 2 weeks ago. SPF has developed into a cup & handle pattern with a 9.16 pivot. Super strong quarterly results and FY EPS estimates.


All data and charts displayed here are the property of MarketSmith, and are published here with their permission. 

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. 

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