Sector & Group Rotation Notes - 9/30/12

Listed below are notes from the author's weekly analysis. This weekend’s analysis is condensed due to other obligations of the author. The Sector Trends blog will probably not publish next Sunday 10/7, but will return Sunday 10/14.

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. 

All data and charts displayed here are the property of MarketSmith, and are published here with their permission. Clicking once on a chart enlarges it for enhanced readability.

Market Overview:

The table below shows price performance for key markets and sectors over the trailing 26 weeks, and is sorted high to low by 5 week performance. The green and red shading denotes relative performance +/- to the SP 500 for the time period in question.

Industry Group	1 Week Gain	2 Week Gain	3 Week Gain	5 Week Gain	13 Week Gain	26 Week Gain
Philadelphia Gold/Silver Index	-2.2%	-0.5%	6.5%	13.4%	21.2%	8.9%
Philadelphia Housing Index	-5.4%	-3.8%	4.7%	8.5%	15.4%	24.2%
KBW Large Cap Bank Index	-1.3%	-4.0%	0.6%	5.1%	8.3%	-0.3%
Russell 2000	-2.1%	-3.2%	-0.1%	3.5%	4.9%	0.9%
FXE euro	-1.1%	-2.1%	0.3%	2.7%	1.4%	-3.8%
Russell 1000 Energy Index	-1.6%	-3.5%	0.6%	2.6%	9.5%	1.7%
IBD 85/85 Index	-1.3%	-1.7%	-1.0%	2.2%	2.6%	-1.8%
DJIA	-1.0%	-1.1%	1.1%	2.1%	4.3%	1.7%
SP 500	-1.3%	-1.7%	0.2%	2.1%	5.8%	2.3%
Nasdaq Composite	-2.0%	-2.1%	-0.6%	1.5%	6.2%	0.8%
Philadelphia Utility Index	1.0%	0.8%	0.4%	-0.2%	-2.3%	2.7%
Pboe Oil Service Index	-4.3%	-7.0%	-2.2%	-1.1%	11.3%	-5.9%
Philadelphia Semiconductor Index	-3.3%	-6.0%	-4.7%	-4.2%	-0.8%	-12.9%
Dow Jones Transportation Index	-0.4%	-6.2%	-3.0%	-4.4%	-6.1%	-6.9%

In last week’s analysis the Sector Trend’s blog noted a slew of warning signs and red flags; this past week the markets responded with two distribution days on the Nasdaq and three on the SP 500. For the week the Russell 2000 fell 2.1%, the Nasdaq 2%, the SP 500 1.3%, and the DJIA 1%.

The Dow Jones Transportation Index declined 0.4% after the previous week’s 5.9% decline, and finished at the bottom of its weekly range. Individual transportation related industry groups have fared no better as 6 of the 7 groups rank in the bottom 50 of price performance for the trailing 3 and 5 week periods. Currently the Dow Jones Transportation Index is riding the bottom of a 21 week horizontal channel; a significant break below the most recent low of 4783.93 would represent a negative development for the market.

The Philadelphia Semiconductor Index fell out of bed this past week gapping down through the bottom of a 7 week channel, losing 3.3% on the week. MarketSmith’s 3 semiconductor related industry groups rank in the bottom 50 on the trailing 1, 3, 5, 13, and 26 week price performance lists. This mirrors the general weakness seen in technology overall, and the combined indication is not suggestive of a healthy market.

Economic data was poor this past week.

On Monday the Chicago Fed National Activity Index fell to minus 0.87 in August from a revised minus 0.12 in July. The three-month average is also sinking more deeply into contraction, from a revised minus 0.26 in July to minus 0.47 in August which is the lowest level since June last year.

The Durable Goods Orders report released on Thursday indicated manufacturing has lost significant momentum with nondefense aircraft leading the way down. New factory orders for durables plunged a whopping 13.2 percent (monthly) in August after a revised 3.3 percent boost in July (originally up 4.2 percent and revised to 4.1 percent in that July factory orders report). Excluding transportation, orders dipped 1.6 percent, following a 1.3 percent decline in July.

The Kansas City Fed Manufacturing Index survey showed weakening, adding to concern from the sharply negative durables orders report for August.

Also on Thursday real GDP growth was unexpectedly revised down for the second quarter. The Commerce Department is now estimating growth at a 1.3 percent annualized pace, compared to the second estimate of 1.7 percent and advance estimate of 1.5 percent. Analysts forecast a 1.7 percent growth rate. The latest number is sharply slower than the 2.0 percent seen in the first quarter and especially the 4.1 percent boost posted for the fourth quarter of last year.

The Chicago PMI report released Friday lurched into negative ground, dropping 3.3 points in September to 49.7 which is the first sub-50 reading of the recovery. New orders had been remaining consistently solid, until this month when they fell a very steep 7.4 points to 47.4, also the lowest level of the recovery.

The red flags listed in last week's analysis, combined with the poor economic data and distribution days of this past week, and the continued defensive rotation seen in the market suggests it is a time for caution on the part of investors.

Larger Group Themes:

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.

33 Commodity Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	6	2	5	4	9	3
# in the bottom 50 groups (out of 197)	16	12	6	10	7	13

28 Technology Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	3	4	7	9	6	2
# in the bottom 50 groups (out of 197)	14	13	15	13	12	14

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	19	22	10	8	5	14
# in the bottom 50 groups (out of 197)	3	1	4	7	10	2

As you might guess from the absence of green-shaded cells there’s not much positive to talk about in the larger group trends represented in the in the tables above.

Both commodity and technology oriented groups have begun faltering as defensively oriented groups have surged to the forefront, and unfortunately this is not the type of action indicative of a healthy market.