Sunday, January 5, 2014

Sector/Group Rotation Notes - 1/5/14



The markets pulled back modestly last week after closing at new highs on New Year's eve. For the week the DJIA fell -0.1%, the Russell 2000 -0.4%, the S&P 500 -0.5%, and the Nasdaq -0.6%. Ordinarily the lagging performance of the Nasdaq would be an eye-catcher, but the blog calculates half of the decline was caused by Apple's (AAPL) -3.4% weekly decline, x-AAPL the Nasdaq fell -0.3%, in line with the other indexes.

Another mitigating factor is the relative performance of technology oriented industry groups last week: despite the Nasdaq's -0.6% decline technology oriented groups led with 9 groups in the top 50 of all groups versus only 4 in the bottom 50. Note as well the performance over the trailing 3 week period - there is a clear preference for technology oriented names versus defensively oriented ones. 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)
6
12
9
9
7
6
# in the bottom 50 groups (out of 197)
11
5
7
6
10
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)
9
7
16
12
5
11
# in the bottom 50 groups (out of 197)
4
7
3
5
9
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
1
5
7
3
# in the bottom 50 groups (out of 197)
8
12
13
14
9
12

Economic data last week was light. The Dallas Fed manufacturing survey Chicago PMI missed consensus slightly but remained positive while the PMI manufacturing index exceeded consensus and the ISM manufacturing index met consensus. Consumer confidence came in higher than consensus while Friday's motor vehicles sales missed.

Summary: Numerous market commentators seem to be calling for a tough 2014 - and who knows, sometime over the course of the next year they may end up being right, given 2013's performance it's not exactly a bold call. That said, the data presented above - markets with a short term preference for technology and an absence of defensive rotation in a growing economy - does not currently support that view. That doesn't mean we won't see a little short term selling, it just means that selling is likely to be a good buying opportunity. It would only take a 3% pullback to get the Nasdaq back to its 50 day MA...

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Industry Group Performance:

Housing: Two weeks ago the December 22 blog post pointed out the improving performance of housing related industry groups, and last week the Philadelphia Housing Index gained 0.2% while the major market indices were falling ~ -0.3% or more.

Of particular interest is the Bldg-Constr Prds/Misc industry group (G3299) which ranks #18 on the trailing 13 week price performance list with a 16% gain, and over the same time period has jumped +72 in MarketSmith's industry group rankings to #17 overall.

PGT Inc. (PGTI) is a name the blog mentioned on numerous occasions last year, and it appears ready to run again. PGTI just broke through a 5 month descending trend line on Friday (the blog tweeted this setup Thursday & mentioned in TM chat) to gain 6.3% for the day. A/D rating is an "A-", sponsorship rating is "A", and institutional sponsorship gains have been robust growing 124 > 177 > 216 > 210 over the last 4 quarters. Last but not least quarterly results and FY estimates are very strong.



The Hsehold-Appliances/Wares group (G3631) benefits from an improved housing sector, and ranks #27 on the trailing 5 week price performance list with a 5.3% and has climbed +47 in MarketSmith's industry group rankings to #84. Whirlpool (WHR) looks like it could work higher from here.

Finance: The Finance-Consumer Loans group (G6148) ranks #37 on the trailing 3 week price performance list with a 5.5% gain, and over the same time has seen its A/D rating improve from "D" to "B-".

Regional Management Corp. (RM) looks ready to help lead the group higher. RM is working its way through a 10 week consolidation but has an A/D rating of "A", a sponsorship rating of "A", SMR rating of "A", EPS growth rate of 38%, ROE of 29%, and quarterly sales increases of +20% over the past 8 consecutive quarters. FY '13 EPS forecast +9%, FY '14 +28%, PE 15. RM is a thin name with a 50 day average volume of only 92K.



Internet: The Internet-Network Solutions industry group (G3586) 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.

Gigamon (GIMO) gained nearly 8% Friday and recaptured its 50 day MA. It 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."



Semiconductors: All three semiconductor groups rank in the top 50 of the trailing 3 week price performance list while simultaneously ranking in the bottom half of the trailing 13 week list. Following the same pattern over the past 3 weeks the Philadelphia Semiconductor Index has gained 4.2% vs. 3.3% for the Nasdaq, but over 13 weeks has gained 5.8% vs. the Nasdaq's 8.5%. The sector could be gaining relative strength.

Advanced Energy (AEIS) is forecast by analysts to see EPS +328% in FY '14 and has seen its quarterly sales increase 0%, +6%, +21%, +22% over the past 4 quarters.



International Rectifier (IRF) has a "B+" A/D rating, with 50 day up/down volume of 1.3, but a 25 day ratio of 2.4. Analysts forecast FY '14 EPS +53%.



Montage Technology (MONT) is recent Chinese IPO that could be setting up for a run. A/D rating "A", SMR rating "A", ROE 76%, FY '13 EPS forecast +59%, FY '14 +30%, PE 23, with robust quarterly sales increases. MONT is a little thin with average daily trade of only 86K. As with all China based stocks buyer beware, note that only 14 funds hold positions and the sponsorship rating is "D".



Media: Media related groups have been on a tear with all 5 groups ranked in the top 35 groups on the trailing 3 week price performance list, the gains run from +5.7% to +13.1%.

Sinclair Broadcasting (SBGI) is under accumulation with a "B+" A/D rank. While the 50 day up/down volume ratio is an unimpressive 1.0, the 25 day ratio is stronger at 1.34, suggesting improved shorter term accumulation. SBGI trades at a PE of 24, but analysts forecast FY '14 EPS +127% to 2.52 per share, giving SBGI a forward PE of ~ 14.5. Quarterly sales have increased +55%, +27%, +25%, +31% over the trailing 4 quarters. On Friday SBGI poked above a 36.57 pivot out of a 8 week consolidation, while simultaneously breaking higher out of a BB squeeze.



Metals: The Metal Prds-Distributor industry group (G5091) has been on a tear ranking #9 on the trailing 5 week price performance list with a 9.3% gain, and over the same 5 week time period jumping +107 in MarketSmith's industry group rankings to #80.

The group is composed of 8 stocks, but for various reasons only PKOH looks attractive, and it's a thin name that's currently extended in price. However, PKOH trades at 15x earnings, and has FY '14 EPS forecast +26%. With "A" A/D and sponsorship ratings its worth watching to see if it sets up again over the coming weeks.

Mining: Last week's blog pointed out the improved performance of the Mining sector, and the blog calculates it was by a wide margin the top performing sector last week gaining 6.6%. Over the trailing month it ranks #3 (+9.1%), but ranks #32 (out of 33) over the trailing 3 & 6 months,  and ranks #33 (-32.2%) over the trailing 12 months.

Southern Copper (SCCO) is seeing some accumulation with a "B+" A/D rating. The 50day up/down volume ratio is only 1.1, but the 25 day ratio is much stronger at 2.3. SCCO has kept more if its institutional sponsorship than many other names in the sector, and has an "A" sponsorship rating.


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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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