Sector & Group Rotation Notes – 11/11/12

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
Dow Jones Transportation Index	-1.8%	-0.7%	-1.3%	-0.6%	-0.9%	-2.4%
Philadelphia Housing Index	-1.8%	0.3%	-2.7%	-2.1%	17.5%	25.2%
FXE euro	-0.9%	-1.7%	-2.4%	-2.5%	3.3%	-1.8%
Philadelphia Semiconductor Index	-0.7%	0.7%	1.3%	-3.5%	-8.9%	-6.3%
Pboe Oil Service Index	-2.8%	-4.7%	-8.8%	-4.8%	-8.5%	-3.1%
Philadelphia Gold/Silver Index	1.2%	-0.9%	-2.5%	-5.4%	14.4%	19.7%
SP 500	-2.4%	-2.3%	-3.7%	-5.5%	-1.9%	2.0%
Russell 2000	-2.4%	-2.2%	-3.2%	-5.7%	-0.8%	0.6%
Russell 1000 Energy Index	-2.4%	-3.5%	-5.9%	-5.7%	-3.9%	2.7%
DJIA	-2.1%	-2.2%	-4.0%	-5.8%	-3.0%	0.0%
KBW Large Cap Bank Index	-3.9%	-2.3%	-4.6%	-6.3%	3.3%	3.7%
Philadelphia Utility Index	-4.9%	-5.9%	-7.5%	-6.4%	-8.6%	-5.0%
Nasdaq Composite	-2.6%	-2.8%	-3.4%	-7.4%	-3.8%	-1.0%

President Obama's reelection Tuesday precipitated a rout in the markets, wiping out any previously visible glimmers of hope. On Wednesday the major indices suffered their largest decline in over a year as the Dow shed 313 points (-2.4%), the S&P 500 34 points (-2.4%) and the Nasdaq almost 75 (-2.5%). As New York Mayor Ed Koch once said, “The people have spoken . . . and they must be punished.” 

The Philadelphia Utility Index led the declines with a whopping 4.9% loss for the week, its largest weekly decline since March 2009. Perhaps coincidentally the selling began November 1, which is when President Obama began to separate from Governor Romney in the polls, and accelerated after his election victory. The President seems determined to raise taxes, and the action in this sector as well as with other dividend paying sectors could be in expectation he will succeed in getting dividends taxed as regular income.

Since hitting a 4 month high of 48.75 in mid September, the Barclays Copper ETF (JJC) has declined 12% and appears close to breaking through the bottom of a yearlong triangle pattern. Many feel the direction of copper is predictive of future GDP due to its use in numerous industrial applications.

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)	7	6	7	10	3	8
# in the bottom 50 groups (out of 197)	7	12	11	7	8	15

28 Technology Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	5	1	7	2	1	1
# in the bottom 50 groups (out of 197)	10	8	11	14	19	18

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	10	7	8	7	8	9
# in the bottom 50 groups (out of 197)	8	8	6	9	7	3

Technology related groups continued their suffering last week with twice as many groups in the bottom 50 as were in the top 50. The selling was widespread, and distributed across almost all sectors, making any additional meaningful deductions from this data difficult.

Bonds/Income:

Municipal bond ETFs popped last week as high income investors began shifting assets into tax free investment vehicles. This blog tracks 57 different Bond/Income ETFs and all 4 of the municipal bond ETFs finished in the top 15 on the 1 week price performance list for the sector. Their weekly performance is summarized in the table below:

Muni Bond ETF	Weekly Gain	Weekly Volume	Yield
PZA	1.2%	+66%	4.1%
MUB	0.9%	+133%	2.9%
HYD	0.7%	+30%	4.9%
TFI	0.7%	+85%	2.9%

These muni bond ETFs seem likely to appreciate further between now and year end.

Two weeks ago this blog pointed out a possible opportunity in emerging market currency bonds, the thesis being they will benefit from developed market countries devaluing their currencies. The President's reelection suggests the Fed's easy money policy will continue, and that was reflected last week in the performance of the Powershares Emerging Market Sovereign Bond Fund ETF (PCY), which gained 0.7% (#11 out of 57 on the 1 week price performance list). PCY is the purest currency bond ETF vehicle, and yields 4.7%. For a fuller overview of the merits of this idea be sure to read this TCW market commentary.

Industry Group Performance:

While the banking groups may fear Elizabeth Warren on the warpath, the same can't be said for the Finance-Creditcard/Pmtpr group. This group has a MarketSmith industry group rank of #45, up 30 over the past 6 weeks, and despite ranking #74 on the 1-week price performance list with a 1.6% loss, the group's relative strength is hitting a new high. Industry group components Visa (V), Alliance Data Systems (ADS), Mastercard (MA), and Discover Financial (DFS) all have RS hitting a new high as well. If and when the market stabilizes the stocks in this group seem likely to continue moving higher.

Alliance Data Systems (ADS) in particular looks attractive. ADS is only 2.3% off its 52 week high while at the same time is resting just 0.6% above its 50 day MA. Its SMR rating is "A", the accumulation/distribution rating is "B+", and its ROE is 443%. Institutional sponsorship has increased by 20% over the last year from 759 funds to 910 funds. 

Last week's blog noted the strong price performance of Auto related industry groups. This past week that strength continued in the Auto Manufacturers group which finished #16 on the weekly price performance list, gaining 0.6%. Although the other groups in the sector pulled back to various degrees their weekly charts still look constructive, and the sector is worthy of review by readers.

Allison Transmissions (ALSN) IPO'd last March at $23, and over the next several months fell to a low of 15.82. FY '12 earnings are forecast +349% to $2.56 per share giving ALSN a forward PE of 8.4. ALSN is under heavy accumulation with an accumulation/distribution rating of "B+" and an up/down volume ratio of 1.9. ALSN has now formed a cup & handle pattern with a 21.74 buy point.

Readers will likely remember Delphi Automotive (DLPH). Delphi IPO'd last November and over the next 4 months soared more than 50%. DLPH is also under heavy accumulation with an accumulation/distribution rating of "A-" and an up/down volume ratio of 1.7. Institutional sponsorship has exploded, going from 122 > 319 > 494 > 561 funds over the last 4 reporting periods. The trailing PE is 9, and FY '12 EPS are forecast +13%, FY '13 +16%. For what it's worth, which may not be much, both Deutsche Bank and RW Baird recently reiterated a target of $41. DLPH has now based for last 9 months and has shown some heavy accumulation over the past week and a half. Buy point is 32.98.

Other Auto related stocks worthy of review by the reader include Ford (F), General Motors (GM), Visteon Corp (VC), Cooper Tire & Rubber (CTB), and Tesla (TSLA).

The Machinery-Mtl Hdlg/Autmn group is the #3 ranked group in MarketSmith's industry group rankings, and last week finished #3 on the 1 week price performance list with a 3.5% gain. This group is ranked #1 on the 13 week price performance list with a 9.5% gain, and #2 on the 26 week list with a 31.5% run. It appears likely to take over the #1 industry group ranking this week or next. Three D Systems (DDD) is the groups top performer, having tripled over the past 11 months.  DDD is now 3% past the 44.80 pivot out of a third-stage cup base.

This past week the Telecom-Fiber Optics group jumped 82 spots in MarketSmith's industry group rankings from #173 to #91, and finished #6 on the 1 week price performance list with a 2.2% gain. Of particular interest or JDS Uniphase (JDSU) and Cienna (CIEN), which benefited from AT&T's (T) Wednesday announcement  that it would spend $22B annually over the next 3 years on capital projects, and intends to spend $14B to expand its wireless and wireline broadband networks. One analyst wrote that the telecom giant will spend about 18% more on capital expenditures over the next three years than research firms' average forecast, and speculated other telecom carriers may follow AT&T's lead and exploit low costs of capital to significantly enhance their networks.  On Wednesday JDSU gained 4.9% in 2.4x average volume, and CIEN gained 9.6% in 2.5x average volume.

The Steel-Producers industry group jumped 46 in MarketSmith's industry group rankings this past week, from #161 to #115. The group has set up an interesting ascending triangle pattern as seen in the chart below. Readers may wish to review the charts in this group in the (unlikely?) event the group breaks to the upside.

Last week's blog pointed out the recent poor price performance in the Medical-Biomed/Biotech group and speculated its near year-long run as a top 15 ranked group was about to end. This past week that prediction came to pass as the group dropped in MarketSmith's industry group rankings to #20.

Another top ranked group that looks to be in trouble is the #1 ranked Finance-Mrtg&Rel Svc group. The group has declined 3.1% and 4.2% over the trailing 2 weeks, and last week's 4.2% decline came in 2x average volume. Although the market cap leader Ocwen Financial (OCN) is holding up, the next three largest market cap stocks in the group (NSM, CLGX, and LPS) have broken their trend lines and pulled back hard, and OCN looks parabolic. The group chart is resting on its lower ascending trend line on the weekly chart, and appears likely to break through to the downside.

Energy related groups continued to get pounded with 9 of 13 groups finishing in the bottom half of the weekly price performance list. 11 of the 13 groups reside in the bottom half of MarketSmith's industry group rankings.