Sector & Group Rotation Notes – 11/25/12

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 Semiconductor Index	3.7%	-0.1%	-0.8%	1.2%	-7.5%	-0.8%
FXE euro	1.9%	2.1%	1.2%	-0.3%	3.7%	3.6%
Dow Jones Transportation Index	3.3%	0.7%	-1.1%	-0.6%	-1.3%	-0.6%
Philadelphia Housing Index	6.1%	1.7%	-0.1%	-1.1%	13.4%	31.2%
Nasdaq Composite	4.0%	2.1%	-0.5%	-1.3%	-3.4%	4.6%
SP 500	3.6%	2.1%	-0.4%	-1.7%	-0.1%	6.9%
Russell 2000	4.0%	1.5%	-0.9%	-1.7%	-0.2%	5.3%
DJIA	3.3%	1.5%	-0.6%	-2.5%	-1.1%	4.5%
KBW Large Cap Bank Index	4.3%	2.2%	-1.8%	-2.5%	4.2%	11.5%
Russell 1000 Energy Index	3.8%	2.5%	0.0%	-3.6%	-0.7%	8.8%
Pboe Oil Service Index	3.7%	4.1%	1.2%	-5.1%	-3.8%	4.7%
Philadelphia Gold/Silver Index	5.2%	-3.7%	-2.6%	-6.2%	3.5%	10.5%
Philadelphia Utility Index	-1.0%	-2.2%	-7.1%	-9.6%	-8.0%	-6.5%

Last Friday the markets began rebounding when Apple reversed after hitting a low of $505.75. The rally continued into this week when on Friday, after adjusting for holiday volume, the market logged a follow through day. On the week the Nasdaq and Russell 2000 both gained 4% while the S&P 500 and DJIA lagged slightly gaining 3.6% and 3.3% respectively.

The Philadelphia Housing Index shot higher gaining 6.1% while the Philadelphia Utility Index continued its weakness losing another 1%; the index has now fallen 9.6% in 5 weeks.

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)	15	5	5	8	4	7
# in the bottom 50 groups (out of 197)	2	5	11	13	9	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)	5	6	4	3	0	0
# in the bottom 50 groups (out of 197)	9	12	8	10	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)	3	7	11	8	7	7
# in the bottom 50 groups (out of 197)	10	6	7	7	7	5

Commodity oriented/impacted groups performed very well placing 15 groups in the top 50 on the 1 week price performance list.

Technology related groups continued their funk with almost twice as many groups in the bottom 50 as in the top 50. While this trend will eventually yield an excellent buying opportunity that time, despite Apple's performance, is not yet here. 6 of the 9 groups finishing in the bottom 50 were Software related.

Defensively oriented groups also fell relative to other groups placing only 3 groups in the top 50. One of these 3 groups was the Tobacco group (G2100) which gained 6.4% on the week to finish #10 on the 1 week price performance list. This gain appears to be more a reaction to an oversold condition caused by concern over dividend taxation rather than a desire on the part of buyers to get defensive in their allocation. A number of the stocks in this group look like they good continue to run into next week.

Industry Group Performance:

On numerous occasions over the past 3 months the Sector Trends blog has noted the encouraging price performance of Auto related groups, that continued this past week as 3 of the 5 auto related groups finished in the top 30 of the 1 week price performance list. The Auto/Truck-Replace Parts group was up 8.3% on the week to rank #1 on the weekly price performance list and jumped from #78 to #23 in MarketSmith's industry group rankings. The table below compares these group's price performance to their MarketSmith industry group rank, the data suggests a sector just starting to turn bullish.

		Price Performance			MarketSmith Industry Rank
Industry Group	MarketSmith Symbol	5 Week Gain	5 Week Rank		11/24/2012	10/27/2012
Auto/Truck-Replace Parts	G3715	10.9%	3		23	135
Auto Manufacturers	G3711	9.5%	5		103	157
Trucks & Parts-Hvy Duty	G1010	5.4%	16		135	189
Auto/Truck-Tires & Misc	G3011	4.4%	22		124	169
Auto/Truck-Original Eqp	G3714	3.5%	29		114	172

This auto industry commentary by Edmunds cites aging vehicles, increased credit availability, and pent-up demand as key components for increased demand for new cars.

Housing related industry groups continued their outstanding performance last week as 6 of 9 housing related groups finished in the top 50 of the 1 week price performance list, and all 9 finished in the top half. 8 of 9 groups rank in the top 50 of MarketSmith's industry group rankings. This move has been in place for some time and does not appear to be slowing down.

Two weeks ago this blog first noted and explained the performance of the Telecom-Fiber Optics group (G3552) which had a one week increase in MarketSmith industry group rank from #173 to #91. Last week the group gained 6.4% to rank #8 on the weekly price performance list and jumped from #94 to #50 in MarketSmith's industry group rankings. JDSU punched though it's 11.30 buy point on Friday rising 3.6%, but volume was soft. CIEN is still trading below its 14.99 pivot but looks like it could move through it next week.

Also in telecom the Telecom-Consumer Prods group (G4894) had a strong week finishing #34 on the weekly price performance list with a 4.8% gain. Analyst comments on RIMM (+26.7% for the week) and Nokia (NOK, +28.5% for the week) powered the gains. Go here and here to read the stories.

Three finance related groups ranked in the top 50 of the 1 week price performance list, of particular interest is the Finance-Consumer Loans (G6148) group which has a MarketSmith industry group rank of #151 but ranks in the top 50 over the trailing 1, 2 and 3 week price lists. FCFS is right at its 47.50 pivot out of a 9 week flat base, and DLLR has broken above a 14 week descending channel.  DLLR has a PE of 8 while analysts project FY '12 and FY '13 EPS +14% and +19% respectively. The accumulation/distribution rating is "B-" and the up/down volume ratio is 1.1.

As noted above utilities continue to get whacked, the Philadelphia Utility Index fell another 1% on the week. All 4 utility related groups finished in the bottom 40 on the 1 week price performance list. In fact, last week only 4 of 197 groups suffered price declines - and two of these groups were utilities. This seems to be in fear that dividends will be taxed as income, and the pull back could be setting up a trading opportunity. Any news (or rumor) that dividends will retain some type of preferential taxation treatment could spark a rally in the sector.

As readers have no doubt already heard ad nauseam, resolution of the "fiscal cliff" will impact the direction of the markets. Bob Woodward's recent book "The Price of Politics" is an exhaustive examination of the debt limit negotiation between the President and Speaker Boehner in the summer of 2011. Although the book's topic is political it provides perspective on the current negotiation that readers should find valuable as they interpret the market impact of news reports. You can purchase "The price of Politics" from Amazon here: