Sector Trends Blog: Sector & Group Rotation Notes

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.

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 Housing Index	2.3%	4.4%	11.5%	13.8%	11.8%	34.3%
Pboe Oil Service Index	3.4%	3.3%	11.9%	12.0%	4.6%	11.0%
Dow Jones Transportation Index	2.2%	2.9%	9.1%	9.8%	12.1%	12.3%
KBW Large Cap Bank Index	0.6%	-0.5%	5.7%	8.6%	6.0%	19.2%
Russell 2000	1.4%	1.6%	7.3%	8.4%	8.7%	12.8%
Philadelphia Semiconductor Index	1.9%	3.3%	9.0%	7.8%	12.5%	12.5%
Russell 1000 Energy Index	2.2%	2.2%	7.9%	6.0%	1.9%	9.9%
Nasdaq Composite	0.3%	1.1%	5.9%	5.5%	4.3%	7.2%
SP 500	0.9%	1.3%	6.0%	5.1%	3.7%	9.0%
DJIA	1.2%	1.6%	5.5%	3.9%	2.3%	6.5%
Cboe Technology Index	-0.2%	0.5%	4.2%	3.7%	-0.3%	1.8%
Philadelphia Utility Index	0.7%	-0.5%	3.4%	2.1%	-4.8%	-6.8%
Philadelphia Gold/Silver Index	-1.2%	-0.7%	0.4%	-2.1%	-13.2%	9.3%

The major market indexes all logged another week of gains with the Nasdaq gaining 0.3%, the S&P 500 0.9%, the DJIA 1.2% and the Russell 2000 1.4%. The strongest gains were seen in energy and housing; last week's blog post showed the Oil Service Index about to break higher through a 21 month long descending trend line and that occurred this past week as the index made a decisive move above the trend line with a 3.4% gain.

Despite Intel's poor earnings semiconductors remain strong, although tech overall is weak. Note the underperformance of the Cboe Technology Index seen in the table above.

Industry group rotation was slightly bearish as defensively oriented groups began to outperform. While not as dramatic as the rotation noted in the September 23rd blog post that marked a market high, it's enough to warrant caution. So far this year there have been two distribution days with mild declines of 0.2% and 0.3%, a third distribution day with a loss of 0.8 or better might serve to confirm the defensive rotation. On the other hand, to the extent the rotation was a result of an anticipated showdown over raising the debt limit it could be a red herring; on Friday the house GOP reversed their position and said they would agree to lift the borrowing limit for three months provided both houses of congress pass a budget.

Regardless of rotation corporate earnings remain the market's short term catalyst. Last week BAC, C, and INTC disappointed while GS, SLB and GE excelled. GE's performance in particular suggested an improving global economy.

The star attraction next week will undoubtedly be Apple's earnings announcement scheduled for Wednesday January 23 after the market close. Barron's Tech Trader blog has a series of blog posts describing analyst's views which you can read here, here, and here.

Next week 363 companies will announce, 197 with market caps $1B+. In addition to Apple some of the more prominent companies announcing include GOOG, IBM, MSFT, HAL, NE, BHI, FCX, URI, NFLX, CELG, RMD, VZ and T.

Economic data released last week was mostly positive. On Tuesday the Commerce Department's Retail Sales report was released, and sales posted a moderately strong 0.5% increase compared to a consensus expectation of a 0.2% increase. Retail related industry groups as a group have been underperforming but responded positively to this report with 11 out of 20 retail related groups finishing in the top 50 of the 1 week price performance list.

The Industrial Production released Wednesday increased 0.3% vs. a consensus expectation of a 0.2% increase despite a pronounced decline in utilities output. This suggests manufacturing is stronger than what one would otherwise assume based on a 0.3% increase.

Thursday saw the release of housing starts and permits data. The number of housing starts exceeded the consensus range, and represented a 36.9% increase over December 2011. Both data points combined indicate a housing recovery proceeding faster than previously assumed.

Data on jobless claims was also released Thursday indicating 335K new claims, a post recovery low and 33K below consensus.

On a negative note Tuesday's Empire State manufacturing report read -7.8, its sixth straight month of contraction, continuing to significantly lag other region's manufacturing activity. The Philadelphia Fed survey released on Friday also indicated contraction, reading -5.8 vs. a consensus range of 2.0 - 14.5. On a positive note both reports indicated increasing optimism in the six month outlook. Friday's consumer sentiment report was also weak coming in slightly below the consensus range of 72.5 - 84.0 at 71.3.

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)	5	8	14	10	9	9
# in the bottom 50 groups (out of 197)	8	8	3	4	8	5

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	5	3	6	4	2
# in the bottom 50 groups (out of 197)	12	8	6	6	8	10

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	12	11	6	2	7	5
# in the bottom 50 groups (out of 197)	4	7	10	17	11	14

As noted above last week rotation became more defensive. A week ago showed 7 defensively oriented groups in the top 50, 6 from the healthcare sector. This week there are 12 groups, with health related groups being joined by food, tobacco and utility related groups.

Industry Group Performance:

Energy: As noted above the Pboe Oil Service Index moved decisively above a 21 month long descending trendline, and 7 energy related groups hold spots in the top 50 of the 3 week price performance list. Although only 3 groups are in the top 50 of MarketSmith's industry group rankings this data suggests a sector that's beginning to move higher.

On Tuesday Oceaneering International (OII) broke out of a 16 week cup & handle base with a 4.3% gain in volume 28% above average. OII is seeing accumulation with a "B-" accumulation/distribution rating, an up/down volume ratio of 1.6, and institutional sponsorship increasing 551 > 564 > 619 > 633 over the past 4 quarters. FY '12 EPS are forecast +31%, and FY '13 +22%. OII is now 4% past its pivot but still in the 5% buy range.

Oasis Petroleum (OAS) is also seeing heavy accumulation and is 1% past its pivot out of a year-long consolidation. The accumulation/distribution rating is "A+", the up/down volume ratio is 1.4, and institutional sponsorship has increased 357 > 372 > 393 > 415 over the last 4 quarters. FY '12 EPS are forecast +72%, FY '13 +64%. OAS trades at 34 times earnings.

Tetra Technologies (TTI) is showing some solid weeks of accumulation since hitting bottom in early November. Analysts forecast FY '12 EPS +43% and FY '13 +38%. TTI trades at 17 times earnings.

Cameron International (CAM) is 2% past its pivot out of a cup & handle base:

Floteck Industries (FTK) is under accumulation with an accumulation/distribution rating of "B+" and an up/down volume ratio of 1.5. FY '12 EPS forecast +46%, FY '13 +29%. FTK looks like buy at current levels out of a 3 weeks tight formation.

Two weeks back Kodiak Oil & Gas (KOG) jumped on takeover speculation after cancelling it s participation in a BMO Capital conference, but sagged 1% on Friday after a Credit Suisse downgrade due to "continuing disappointing operating performance and less likely M&A probability near-term". Regardless, KOG merits attention, especially on a move above 9.74.

Carrizo Oil & Gas (CRZO) looks to have put in a solid bottom at 19.50, having bounced from this level 4 times over the past two and a half months. On Tuesday CRZO updated prior guidance and confirmed both oil and natural gas Q4 production "is now expected to be near the high end of guidance". Following the announcement CRZO gained 10.5% for the week on 2x average volume. CRZO looks like a buy with a break out of its current 5 week consolidation at 22.69.

Transports: As shown above in the market overview section the Dow Jones Transportation Index has broken decisively higher above a long term trendline. Transportation related industry groups have mirrored this performance with at least 4 groups in the top 50 of the 1, 3, 5 and 13 week price performance lists.

Union Pacific (UNP) is 2% past its pivot out of a 14 week flat base:

Old Dominion Freight Lines (ODFL) is 3% past its pivot out of an 8 week flat base. EPS 91, RS 85, SMR "A".

J.B. Hunt Transportation (JBHT) is 4% past its pivot, also out of an 8 week flat base. EPS 85, RS 76, SMR "A", Acc/Dis "B+".

Retail: Retail related groups have been weak relative to their recent performance, but perked up this past week after the Retail Sales report came in above expectations. 10 retail related groups, out of 20 total, finished in the top 50 of the 1 week price performance report, and 5 retail groups have MarketSmith industry group ranks in the top 50.

Pier One Imports (PIR) is under accumulation as it leaves a second stage 10 week consolidation. FY '13 EPS forecast +28%, FY '14 +17%. EPS 95, RS 86, SMR "A", PE 20. PIR is 4% past its pivot and still within the 5% buy zone.

Shutterfly (SFLY) is under heavy accumulation as it approaches its 35.00 pivot out of a 17 week consolidation. SFLY has a "B+" Accumulation/Distribution ranking, and while the 50 day up/down volume ratio is a healthy 1.5, the 25 day up/down ratio is 3.0! FY '13 EPS are forecast +92%.

Gap Inc. (GPS) is another stock showing a pickup in short term accumulation, the 50 day up/down ratio is 1.0, but the 25 day ratio is a much healthier 1.5. GPS looks like a possibility with a break of the descending trend line.

Chicos Fas (CHS) is meandering in the middle of a tight 5 month flat base. It's not giving any signs of an imminent move, but warrants setting an alert at ~ 19.50 with a buy point of ~ 19.75.

Lumber Liquidators (LL) is yet another retail name showing heavy short term accumulation. The 50 day up/down volume ratio is a weak 0.8, but the 25 day ratio is a strong 1.6. RS 98, EPS 98, FY '12 EPS forecast +71%, FY '13 +25%. LL has a 58.80 but point out of a 12 week cup base.

Healthcare: Healthcare groups having been showing new relative price strength over the past two weeks.

Catamaran Corp (CTRX) has FY '12 EPS forecast +37%, FY '13 +63%. Institutional sponsorship has increased from 599 funds at the end of March to 915 funds at the end of December. CTRX has a 53.13 pivot out of an 11 week flat base.