Sector & Group Rotation Notes - 8/5/12

As regular readers know this blog temporarily ceased publishing June 27th. The author is developing a new blog format and plans to resume regular publication sometime in the future. In the interim listed below are notes from the author's weekly analysis.  

The perspective offered is on which sectors and groups are rotating, and which stocks from these groups could perform well in a neutral/positive market 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 listed here. 

All data and charts are from MarketSmith, and are published with their permission. For formatting reasons charts are posted in a smaller format, clicking on a chart enlarges it for enhanced readability.

Summary:

Commodity related groups performed well on the week. The table below shows commodity related group's price performance over the trailing 1, 2, 3, 5, 13 and 26 week periods. Notice over the 1, 3 & 5 week periods almost twice as many are in the top 50 groups overall as are in the bottom 50.

33 Commodity Oriented  Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	10	7	13	12	4	2
# in the bottom 50 groups (out of 197)	6	9	5	6	13	14

The performance of defensively oriented groups is beginning to wane. The table below shows defensively oriented  group's price performance over the trailing 1, 2, 3, 5, 13, and 26 week periods. Notice the strong performance of defensive groups over the 13 and 26 week periods, and contrast that with what you see over the shorter time periods, especially the past 3 weeks.

30 Defensively Oriented  Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	5	5	2	7	17	14
# in the bottom 50 groups (out of 197)	6	9	12	8	2	3

After weeks of pounding the performance of technology oriented groups could be turning positive. The table below shows technology related  group's price performance over the trailing 1, 2, 3, 5, 13, and 26 week periods. Notice how the ratios turned slightly positive over the 2 and 3 week periods.

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	9	12	4	2	4
# in the bottom 50 groups (out of 197)	11	7	7	12	13	11

Rotating Groups:
The Electronic-Parts group and Elec-Scientific/Measuring groups rank #156 and #124 in MarketSmith's industry group rankings. On the shorter term 5 week price performance list the two groups rank #21 and #42 respectively and the groups could be beginning to turn. Stocks of interest include:

o    Proto Labs (PRLB) is a recent IPO with 2012 EPS forecast +20%, 2013 +30%. For the last 3 days PRLB has been flirting with breaking through a 39.08 pivot, closing Friday at 37.89. PRLB is a very thin stock with an average daily volume of only 163K.

 

o    FEI Company (FEIC) announced earnings after the close on Thursday and on Friday broke out of a cup & handle base, gaining 12.4% on volume 250% above average. FEIC is 2% past its 51.60 pivot.

 

o     IPG Photonics Corp (IPGP) has seen heavy accumulation since announcing earnings last Tuesday. IPGP announced EPS of 0.72 vs. consensus 0.66, and revenue of 137.9 vs. 134.8. They see Q3 EPS 0.74-0.84, vs. consensus 0.72  and see Q3 revenue $145M-$155M, vs. consensus $143.9M. IPGP has a 57.51 pivot out of 12 week cup shaped base, and closed Friday at 57.24. IPGP institutional sponsorship has increased 252 > 271 > 302 > 306 funds over the last 4 quarters and has an up/down volume ratio of 1.6. 

 

Energy related groups are improving. In MarketSmith's industry group rankings only two of 13 energy groups are ranked in the top half of all 197 groups; and of the 11 groups in the bottom half, 8 are in the bottom 50. However, on the shorter term price performance lists energy groups are outperforming. On the 5 week list 8 groups are in the top 50 with only 2 in the bottom 50, and on the 3 week list 7 groups are in the top 50 with none in the bottom 50. Stocks of interest include:

o    Carrizo Oil & Gas Inc. (CRZO) 2012 EPS are forecast +120% (2.16), 2013 EPS forecast +114% (4.63), at its current price of 24.67 CRZO trades at a little over 5x 2013 estimates. CRZO is 37% off its 52 week high yet is under accumulation - the 50 day Up/Down volume ratio is 1.1 and the shorter term 25 day Up/Down volume ratio is 1.5 indicating a recent increase in accumulation. CRZO's accumulation/distribution rating is a "B+" and the SMR rating is an "A". Pivot would be around 26.50 on a move above the 200 DMA.  

 

o    Flotek Industries Inc. (FTK) is trading at 14x trailing earnings, but analysts project 2012 EPS +32% (0.74) and 2013 EPS +49% (1.10) meaning FTK trades at about 9x 2013 estimates. At the recent Global Hunter energy conference the CEO stated (paraphrase) "we are not at all concerned street guidance will prove too aggressive".  Volume has dried up over the past 5 weeks. FTK will host a conference call on Thursday, August 9, 2012, at 7:30 a.m. Central Time to discuss its operating results for the quarter ended June 30, 2012.

   

o    Kodiak Oil & Gas (KOG) fell 7% on Thursday before earnings, only to gain 7.9% on Friday after the announcement. Analysts project KOG's 2012 EPS +373%, and 2013 EPS +88%, KOG trades at a little over 8x 2013 estimates. Institutional sponsorship (# of funds) has increased over the last 4 quarters 193 > 270 > 311 > 333. 

 

The Internet-Content industry group has been a consistent performer ranking in the top 50 on the trailing 1, 2, 3, 5, 13 and 26 week price performance lists. Stocks of interest include:

o    Blucora Inc. (BCOR) announced earnings July 27 that crushed estimates  earning 0.53 vs. estimates of 0.14. BCOR also increased forward guidance, seeing Q3 EPS of 0.19 - 0.23 vs consensus of (0.02), and revenues of $90M - $93M vs. $77.5. BCOR jumped 27% on 6x average volume, and has now developed an attractive bull flag pattern. However, it is a thin stock with average daily volume of only 246K.

o    I A C /Interactivecorp (IACI) beat earnings July 25 and doubled its quarterly dividend. IACI is 1% past a 52.78 pivot out of a cup shaped pattern. EPS are forecast +24% in 2012 and +26% in 2013.

 

o    Zillow (Z) has a 44.00 pivot out of a cup and handle pattern and announces earnings Tuesday 8/7/12. However, the 50 day Up/Down volume ratio is poor at 0.7 suggesting this stock has its share of doubters.

 

Software groups have been taking a beating - only 1 software related group ranks in the top 50 on the 5 week price performance list, while 6 groups (out of 10 total) rank in the bottom 50. However, software stocks have a statistically significant seasonality and analysis (from Erlanger Chart Room software) suggests we could be at the start of a seasonally strong period for software. Recently the best performing group has been the Computer Sftwr-Design group which ranks in the top 50 of all 197 groups in price performance over the trailing 1, 2, 3, 5, and 13 week time periods; and has been the top performing group over the past 2 and 3 week periods. This is a sector worth keeping an eye on.