Sunday, January 26, 2014

Sector/Group Rotation Notes - 1/26/14

The Nasdaq hit another 13 year high on Wednesday before selling off hard Thursday and Friday. Traders woke up Thursday to news that China's Purchasing Managers index had fallen to 49.6 from a reading of 50.5 in December (a number below 50 indicates contraction). This news, combined with concern over emerging market currencies precipitated the global equity sell off. For the week the DJIA fell -3.5%, followed by the S&P 500 -2.6%, the Russell 2000 -2.1%, and the Nasdaq -1.7%.

Economic data this past week was light. On Thursday existing home sales came in just slightly below the consensus average at 4.87M vs. 4.90, and the PMI manufacturing index flash report missed consensus at 53.7 vs. 55.0 consensus. The Kansas City manufacturing index rebounded moderately from December, mirroring the improvement seen in the NY Fed's reading last week.  

Next week sees a heavier schedule of releases. Key data includes new home sales 10 AM Monday, durable goods orders 8:30 AM Tuesday, the FOMC meeting announcement 2 PM Wednesday, and GDP and jobless claims 8:30 AM Thursday.

Numerous companies responded positively to their earnings releases last week including weekly gains for Netflix of +17%, Netscout +15.5, Logitech +13.8%, Open Text +11%, and F 5 Networks +8.2%. Losers on the week included Advanced Micro Devices -17%, Intl Game Technology -14.8%, Kansas City Southern -15.2%, and Freeport Mcmrn Cpr&Gld -9.5%.

799 companies release earnings results next week including Illumina, Arkansas Best, Natus Medical, Constant Contact, Harmon Industries, and Align Technology. Four recently hot China based companies also report:,, Sungy Mobile and Montage Technology.

Weekly price performance of technology, commodity and defensively oriented groups was uninformative with technology oriented and defensively oriented groups providing neutral readings for the week. Commodity oriented groups leaned on the negative side, with only 4 such groups ranking in the top 50 groups, and 15 in the bottom 50. Interestingly, technology oriented groups also held up well when measured over the 2 day sell off at the end of the week with 5 groups in the top 50 and only 6 in the bottom 50.

The market is becoming more sensitive to sector selection. As of January 4 the blog calculates that over the trailing 3 months there were 16 sectors with +10% gains and only 1 sector showing a loss. As of Wednesday January 22 (before last week's sell off) there were only 6 sectors showing +10% gains and 4 sectors showing losses.

Summary: Last week the blog wrote "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." Despite last week's sell off the weekly chart of the Nasdaq posted below shows the trend intact, and on Wednesday an all-stock advance decline line followed by the blog hit a new high, behavior that contradicts the idea of a sustained market pullback. Last week's performance in technology oriented groups suggests there will continue to be opportunities in that sector of the market, and the blog expects the market to continue to offer opportunity for those investors positioned in the right groups and sectors. That said, clearly the market is not as strong as it was 4 weeks ago and could be entering a period of consolidation. Friday's action resulted in a market that's oversold so look for bounce early in the week.


Industry Group Performance:

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 writing that 3 weeks ago Internet-Network Solutions  has been the 6th best performing group with a 7.5% gain, last week it was the 2nd best performing industry group with 2.5% gain (Leisure-Movies & Related was #1, +5.1%, powered higher by Netflix' earnings beat). Over the same 3 week period the group's MarketSmith industry group rank has improved +37 to #104.

This will mark the 4th consecutive week the blog has highlighted Gigamon (GIMO). Last week's blog pointed out the 3 weeks tight pattern on its weekly chart and for the week GIMO gained 6.1% in volume 56% above average (70% above average if you adjust for the 4 day week). Best of all that 6.1% gain occurred Thursday & Friday while the rest of the market was in freefall. On Thursday GIMO gained 3.4% in volume 85% above average, and Friday it gained 4.6% in volume 150% above average.

Software: Software has been a strong sector and despite last week's sell off continues to boast 6 of 10 groups in the top 40 of the trailing 2 and 3 week price performance lists. Five software related groups have MarketSmith industry group ranks in the top 50, and 9 of 10 are in the top 60.

Realpage (RP) was featured last week and pulled back -0.9% in below average volume. RP enjoys a ROE of 15%, EPS growth rate of 76%, and EPS estimates were recently revised higher with FY '13 EPS estimates +28%, and FY '14 +27%. While the 50 day up/down volume ratio is only 1.0, the 25 day ratio of 1.5 indicates shorter term accumulation. RP looks attractive with a break of the descending trend line seen in the chart below.

Tableau Software (DATA) is another stock highlighted last week; despite the sell off DATA still gained 3.3% for the week even after giving up 4.6% on Friday. DATA is part of the Computer Sftwr-Database group which ranked #14 for the week with a 0.6% gain.

Marketo (MKTO) is a chart the blog tweeted on Jan 12 @ 41.10. MKTO has picked up 4% since then, and spent Thursday and Friday of last week pulling back in mild volume -55% to average over the two days. MKTO's sales growth for the last 4 quarters has been +60% each quarter.

Rally Software (RALY) builds cloud based software that helps companies implement Agile/Lean management strategies. RALY IPO'd in April and had a nice run from 18 to 33 before correcting back to a low of 15.46. Since hitting that low on December 18 RALY rallied to a high of 21.50 on January 7th and has traded in a tight channel since. RALY has a "B+" A/D rating, and the 25 day up/down volume ratio of 2.1 doubles up on the 50 day ratio of 1.0. The Bollinger Bands are tightening up into a volatility squeeze suggesting price movement in the near future.  Set your alert ~ 21.45.

The Computer Sftwr-Gaming group was the 11th best performing group last week gaining 0.9%. Most of this gain was result of Shanda Games (GAME) 18% weekly gain in volume 285% above average. GAME, a China based company, was completely unaffected by the miss in China's PMI as well as the mini accounting scandal that seemed to impact some Chinese names. GAME has seen three positive analyst EPS revisions in the last 60 days.

Energy: The Oil&Gas-U S Expl&Prod group has been an underperformer ranking #188 on the trailing 13 week price performance list with a -8.9% loss. That may be beginning to change as last week the group improved after news of falling stockpiles. The group finished the week with 0.6% gain, 13th among all groups, but what really caught attention was the number of 5%+ moves made by individual stocks early in the week: 13 on Tuesday and 9 more on Wednesday. Given the weakness in the group this could be an indication of bottoming.  Admittedly this is a thin reed upon which to base a thesis of group rotation, but the group has a large collection of stocks with robust EPS estimates for both this year and next, so it's a possibility worth watching for.

One stock out of the group the blog finds interesting is Linn Co. (LNCO) which trades as the equity arm of LINN Energy LLC (LINE). LNCO's sole purpose is to own LINN units (LINE) and yields 8.9%; owning LINN units through LNCO relieves the shareholder of the tax reporting requirements of owning LINN units directly. LNCO shares are showing significant accumulation with an A/D rating of "A-" and a 50 day up/down volume ratio of 1.3, while analysts forecast FY '14 EPS +188%.

Banks: There's a clear dichotomy in the industry group performance of the banking sector, with money center (GS, JPM, etc.) and foreign banks getting hit while the super regional and regional banks putter along mostly unscathed. The table below demonstrates this showing the trailing week's price performance for industry groups in the banking sector:

Price Performance

Industry Group
1 Week Gain
1 Week Rank

Ind. Group Rank
1 Wk Rank Δ
Banks-Super Regional






Banks-Money Center


Mining: For the last few weeks the blog has discussed the improving strength in the mining sector. Last week the Mining-Metal Ores group took a pronounced step backwards on the news of China's PMI contraction, falling -4.7% for the week. The Mining-Gold/Silver/Gems group was the 4th best performing group for the week gaining +1.5%.


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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