Sector & Group Rotation Notes - 10/21/12

Listed below are notes from the author's weekly analysis.

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 Utility Index	2.0%	1.2%	1.9%	2.7%	-2.1%	4.9%
Philadelphia Housing Index	6.7%	0.6%	5.7%	1.7%	20.2%	37.1%
FXE euro	0.5%	-0.1%	1.3%	-0.8%	7.0%	-1.6%
DJIA	0.1%	-2.0%	-0.7%	-1.8%	4.1%	2.4%
SP 500	0.3%	-1.9%	-0.5%	-2.2%	5.2%	4.0%
KBW Large Cap Bank Index	0.9%	-1.8%	1.7%	-2.3%	12.4%	6.1%
Dow Jones Transportation Index	0.7%	0.7%	3.9%	-2.6%	0.2%	-2.9%
Russell 1000 Energy Index	1.7%	0.2%	0.4%	-3.1%	7.9%	6.2%
Philadelphia Gold/Silver Index	0.5%	-3.0%	-2.7%	-3.2%	25.9%	13.2%
Pboe Oil Service Index	3.7%	4.4%	2.5%	-4.7%	6.1%	-0.4%
Russell 2000	-0.3%	-2.6%	-2.0%	-5.1%	3.7%	2.1%
Nasdaq Composite	-1.3%	-4.2%	-3.5%	-5.6%	2.7%	0.2%
Philadelphia Semiconductor Index	-0.5%	-4.8%	-4.5%	-10.2%	0.0%	-9.9%

The tech sell off continued last week helped along by poor earnings announcements from Intel, IBM, Google and Microsoft. On Friday the Nasdaq fell 2.2% in heavy options-expiration fueled volume, and was down 1.3% for the week. The S&P 500 actually posted a 0.3% gain on the week despite Friday's 1.7% decline, and for the week the DJIA was +0.1% while the Russell 2000 was -0.3%.

The tech-centric nature of this decline is easily seen in Friday's index volumes. Friday's S&P 500 volume ran 40% above its 50 day MA and the Nasdaq ran +35%, so at first glance they may seem equivalent. But Friday was options expiration, so a true comparison would compare these volumes against the non-quadruple witching options expiration average volume, and doing so for the last 9 such Fridays shows the S&P500 volume coming in 11% below average, while the Nasdaq volume came in 12% above average. Consider also that over the last 4 weeks the Nasdaq has declined 5.5% vs. a 1.8% decline for the S&P 500, and that the composition of the Nasdaq is roughly 47% tech vs. ~ 15% for the S&P500. Lastly, several other important sectors are performing well: the Philadelphia Housing Index gained 6.7% for the week helped along by more bullish housing data, financials are mostly holding up well and the energy sector seems to have bottomed.

This blog's view is that tech has been weak since last March and its current performance puts us closer to the end of this weakness than the beginning. Potential inflection points include market reaction to Apple's earnings announcement next Thursday, and the performance of the Philadelphia Semiconductor Index as it approaches support in the 345 area.

Apple (AAPL) is a leader, and leaders tend to break last, not first. While some are alarmed by Apple's current weakness, since the March 2009 bottom AAPL has had 22 defined pull backs averaging -11.30%, with the largest being -26.9% (flash crash May'10), and the other 4 largest declines registering -14.1%, -14.9%, -16.2%, and -18.9%. Currently Apple is 13.5% off its most recent high suggesting the bulk of its pull back could be behind it. Ideally we would see some capitulation selling in the neighborhood of 35 to 40M shares as it tags the 200 day, but regardless of whether we see this or not market reaction to their earnings results will be key.

Semiconductors have been the leaders in this decline with the average semi group off almost 20% from its 52 week high. Since last December the Philadelphia Semiconductor Index has bounced off support at the 345ish level 4 times. Should it see this level again, and it probably will, how it reacts when it gets there will tell you what you need to know.

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)	13	13	7	5	10	3
# in the bottom 50 groups (out of 197)	2	1	1	8	5	14

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	1	1	1	2	1
# in the bottom 50 groups (out of 197)	17	21	24	22	15	17

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	6	6	8	14	6	12
# in the bottom 50 groups (out of 197)	11	10	7	3	12	0

The performance of the commodity oriented/impacted groups, as well as some of the weakness seen in defensively oriented groups, suggests some underlying health in the market.

However, the weakness in tech is readily apparent both in the table above as well as in the performance of the Nasdaq composite. And as this blog has pointed out many times, the market performs best when the Nasdaq's relative strength is leading the market, not when its lagging.