Sunday, January 19, 2014

Sector/Group Rotation Notes - 1/19/14

Last week the Sector Trends blog summarized the market condition as follows: 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.”

As if to demonstrate the accuracy of that statement, on Monday the markets started the week with the Nasdaq falling 1.5% in volume 27% above average. Suddenly the uptrend was under pressure and the world was ending! Until Tuesday, when buyers returned en masse… from Monday’s close through the end of the week the Nasdaq gained a solid 2% in volume ~ 14% above average, and closed Thursday at a new 13 year high.

Some may wonder if distribution days matter any longer. The blog’s view is that what matters is how the market reacts to distribution days. There's a well documented correlation between clustered distribution days and subsequent market weakness, so most of the time the market reacts by moving lower.

So what does it mean when that doesn’t happen? What does it mean when the model is suddenly better at picking buy points than sell points? Is the model broken? The blog’s view is that it’s not broken but just ineffective because this market is so strong. It will doubtless work again in the future when this bull ends (whenever that is), but in the mean time see this market for what it is (very strong) and don’t let confirmation bias trick you into dumping your stocks every time there’s a 1.5% sell off.

Last week’s economic data continued to reflect an improving economy. Tuesday's release of December's retail sales figures which were surprisingly solid showing a gain of 0.2% vs. a consensus expectation of 0.0%; less autos the gain was 0.7% vs. an expected gain of 0.4%. December business inventories came in higher than expected gaining 0.4% M/M vs. a 0.3% consensus, but remained in line with sales. Wednesday’s Empire State manufacturing survey came in at a very strong 12.5 vs. a consensus of 3.3 indicating strong growth in a region of the country that has been lagging. Thursday’s consumer price index remained tame, and jobless claims were inline while the housing market index suggested builder confidence remains high. Friday’s housing starts exceeded consensus while permits slipped 3%, but the slip in permits seems to have been the result of poor weather.

Last week the blog noted that technology oriented groups were outperforming defensively oriented groups, and the uptick in the performance of defensive groups was related to a rush of buyers moving into the healthcare sector. This past week technology oriented groups dominated with 16 tech related groups ranking in the top 50 of the trailing 1 week price performance list, while only 1 group finished in the bottom 50 (Computer Software-Gaming, -2.2%). This strong performance from technology oriented groups suggests continued gains and is a positive for the health of the market.

Earnings season is upon us and will be a driver of results going forward.  Last week 88 companies reported gaining an average of 1.6% for the week. Of those 88 companies 45 were from the banking sector and those gained 0.3% for the week. Using only these 45 reporting companies to calculate performance Banks-Super Regional gained +3.1% (5 reports), followed by Banks-Northeast +0.9% (10 reports), Banks-Money Center +0.4% (7 reports), Banks-Midwest +0.4% (8 reports), Banks-West/Southwest -0.9% (3 reports), and Banks-Southeast -1.1% (12 reports).

Next  week 299 companies report, 97 of these from the banking sector. High relative strength names reporting include Netflix, Forest Labs, Delta, American Airlines, Southwest Airlines, and Invensense. Large cap names reporting include Microsoft, IBM, Verizon, McDonalds, Ebay, Starbucks, Halliburton, and Freeport McMoRan.

Summary: This is a very strong market with buyers tripping over themselves to get positions in the technology and healthcare sectors. Positive economic data combined with weakness in defensive issues points to a continuation of the trend.


Industry Group Performance:

Medical: Last week’s analysis described the explosion in the Medical sector, and that continued this past week as the sector ranked #2 picking up 3.6%, with 11 of the 14 medical related industry groups ranking in the top 50 of the trailing 2 and 3 week price performance lists. Three of the sector's stocks highlighted by the blog last Sunday had stellar weeks with STML +44.3%, KPTI +25.2%, and CADX +14%.

Xenoport (XNPT) was mentioned last week and still appears to have potential. XNPT is under heavy accumulation, with an "A+" A/D rank, 50 day up/down volume of 1.9, and 25 day up/down of 3.8. XNPT also enjoys an "A" sponsorship rank. XNPT has faded back to its 6.50 pivot in low volume.

Supernus Pharmaceuticals (SUPN) is seeing strong accumulation and has just recently emerged out of a 7 month channel. A/D is “B+”, 50 day up/down volume 1.8, 25 day 3.0, and SUPN enjoys an “A” sponsorship rank.

Software: It was another strong week for the software sector with 7 of 10 software related industry groups ranking in the top 40 of the trailing 1 week price performance list, and numerous groups making significant moves higher in MarketSmith’s industry group rankings. There are now 6 software related groups with MarketSmith industry group rankings in the top 50, and it appears this will be increasing. The only group that seems out of favor is the Computer Sftwr-Gaming group, which lost -2.2% last week and fell -38 in MarketSmith’s rankings to #107.

Tableau Software (DATA) has set up in a cup & handle pattern and broke out Thursday gaining 3.3%, but in volume only 10% above average. DATA is seeing some accumulation however, the A/D rank is "A-", and the 25 day up/down volume ratio is at 1.25. Institutional sponsorship increased from 232 to 260 funds over the last quarter, and sponsorship quality is ranked as a "B". DATA's last quarter results were stellar with EPS +300%, and sales +90%. DATA reports earnings 2/4/14.

Guidewire (GWRE) moved out of a double bottom base on Friday gaining 2.3% in volume 29% above average, it's now 2% past the pivot. GWRE is under heavy accumulation with a 25 day up/down volume ratio of 2.2, a 50 day ratio of 1.4, and A/D rating of "B". Sponsorship has increased 297 > 331 > 372 > 421 over the past 4 quarters, and analysts forecast FY '15 EPS +73%.

Advent Software (ADVS) seeing solid accumulation as it sets up in a 4 weeks tight pattern. A/D "B+", 50 day up/down volume ratio 1.5, 25 day ratio 1.7. ROE 18%, RS 88, EPS 95.

The blog tweeted out the Medidata Solutions (MDSO) chart last Sunday evening (1/12) and it gained a little over 2% for the week. MDSO still looks good here as the chart looks ready to break higher out of a Bollinger Band volatility squeeze. MDSO is under accumulation with a "B+" A/D rank, 50 day up/down volume of 1.6, and sponsorship increases of 238 > 256 > 310 > 315 over the last 4 quarters. MDSO is scheduled to report earnings 2/6/14.

Realpage (RP) is under accumulation despite the fact its pulled back 18% from its late October high. A/D rank is "B-", with a 50 day up/down volume ratio 1.0, but a 25 day ratio of 1.5 indicating shorter term accumulation. EPS 97, ROE 15%, EPS growth rate 76%, FY '13 EPS estimates +28%, FY '14 +27%. Check out the hammer on the weekly chart.


Internet: The January 5 blog post pointed out the improving strength of the Internet-Network Solutions group writing the "group has been a laggard group with a MarketSmith industry group rank of #141. However, that could be changing as the group ranks #23 on the trailing 5 week price performance list with a 5.3% gain." Since then the group has gained an additional 4.9% to rank #18 on the trailing 2 week price performance list and has jumped +33 in MarketSmith's industry group rankings from #141 to #108.

Both Gigamon (GIMO) and Solarwinds (SWI) were highlighted in previous posts and continue to look favorable. GIMO has a 3 weeks tight pattern on its weekly chart.

Computer: Computer related industry groups are gaining strength, especially the Computer-Data Storage group which gained 9.9% last week (#2) and jumped +74 in MarketSmith’s industry group rankings from #121 to #47. Three of the four groups from the sector rank in the top 40 of the trailing 5 week price performance list.

Electronics For Imaging (EFII) tried to break out Wednesday before falling back below its pivot. EFII is showing solid accumulation and recent EPS revisions have been higher. Look for EFII to take another shot at it, perhaps after earnings which are scheduled for Tuesday 1/28 AMC.

Mining: Two weeks ago the blog pointed out the improving performance of the mining sector, and that continued this past week as it was again the top performing sector with a 6.9% gain. For the week the Mining-Gold/Silver/Gems industry group ranked #5 on the trailing 1 week price performance list with a 6.5% gain, and jumped +20 in MarketSmith’s industry group ranks from #188 to #168. The Mining-Metal Ores group finished  #7 on the 1 week price list gaining +3.9%, and over the past 5 weeks has jumped +56 in MarketSmith’s industry group ranks from #142 to #86.


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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