Sector & Group Rotation Notes – 3/17/13

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
Dow Jones Transportation Index	2.1%	4.8%	5.5%	6.1%	20.9%	20.3%
KBW Large Cap Bank Index	1.6%	6.2%	5.5%	4.6%	16.8%	11.4%
Philadelphia Utility Index	1.4%	2.7%	3.5%	4.5%	9.4%	4.7%
Russell 2000	1.1%	4.1%	4.0%	4.2%	15.6%	10.2%
DJIA	0.8%	3.0%	3.7%	3.7%	10.5%	6.8%
Philadelphia Housing Index	0.4%	4.9%	5.4%	2.9%	16.7%	16.6%
SP 500	0.6%	2.8%	3.0%	2.8%	10.4%	6.5%
Philadelphia Semiconductor Index	-0.2%	2.1%	2.2%	2.2%	13.9%	6.8%
Nasdaq Composite	0.1%	2.5%	2.8%	1.7%	9.3%	2.0%
Russell 1000 Energy Index	1.2%	2.6%	2.3%	1.3%	10.7%	3.1%
Cboe Technology Index	1.0%	3.3%	2.3%	0.8%	4.8%	-8.6%
Pboe Oil Service Index	2.0%	3.3%	1.6%	0.4%	16.4%	3.6%
Philadelphia Gold/Silver Index	0.9%	0.9%	-1.4%	-11.8%	-18.4%	-30.0%

Another solid week for the indexes as the Russell 2000 picked up 1.1%, the DJIA 0.8%, the S&P 500 0.6%, with the Nasdaq lagging with a 0.1% gain. Select transportation and energy groups had very strong weeks.

Friday was a distribution day for the Nasdaq but volume was inflated by options expiration.

Economic data last week was solid as retail sales surprised with a 1.1% M/M increase vs. 0.5 consensus expectation. Industrial production also beat with a 0.7% increase vs. 0.5% consensus, and jobless claims came in lighter than anticipated. The only discordant note for the week was from Friday's consumer sentiment report, which missed badly at 71.8 vs. 77.5 consensus, but the survey indicated buying plans remain unchanged suggesting the miss is likely due to the President's deliberate efforts to incite panic and alarm over the budget sequestration. <Sigh>... only 1,404 more days.

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.

30 Commodity Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	10	12	7	6	7	8
# in the bottom 50 groups (out of 197)	7	8	9	11	8	9

28 Technology Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	8	11	11	9	5	1
# in the bottom 50 groups (out of 197)	9	6	9	9	8	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)	6	3	5	7	4	10
# in the bottom 50 groups (out of 197)	7	11	5	3	9	6

There are no clear patterns of rotation between the three different industry group themes when observed from the perspective of trailing price performance.

Industry Group Performance:

Energy: It appears rotation into the sector is occurring, but more importantly there is rotation within the sector that should provide investors opportunity for reward.

Eight weeks ago the Sector Trends January 20th blog post noted the Pboe Oil Service Index break of its 21 month descending trend line writing "the index made a decisive move above the trend line with a 3.4% gain." Since then the Oil&Gas-Machinery/Equip group (G3533), Oil&Gas-Refining/Mktg group (G2900), and Oil&Gas-Field Services group (G1380) all rank in the top 50 of the trailing 8 week price performance list with gains of 10.8%, 10.3%, and 8.9% respectively.

Two weeks ago this blog's March 3rd entry pointed out the "interesting anomaly" in the Oil&Gas-Canadian Expl&Prod group (G1312), writing "the group could be close to breaking a 2 year descending trend line." That occurred four days later on Thursday March 7, and over the past 2 weeks the group is ranked #10 on the trailing 2 week price performance with a 7.6% gain, followed by the Oil&Gas-U S Expl&Prod group (G1310) at #13 with a 7.1% gain.

At the same time the Oil&Gas-Refining/Mktg group (G2900) has been weakening and although still ranked #9 in MarketSmith's industry group rankings, it ranks #170 on the trailing 5 week price performance list with a 0.7% loss (+10.3% over 8 weeks). That the group is weakening can also be seen in the price performance of individual equities; on March 5th the S&P gained a solid 1%, the Nasdaq gained 1.3%, and NYSE advancing  issues led decliners by a 3:1 ratio. This same day Calumet fell 3.1%, Alon fell 3%, and Delek gave back 0.3%.

This data suggests that groups involved in the exploration and production of energy may begin to outperform, and groups that support exploration and production (machinery, field services, etc.) should continue to perform well. Refiners may have already experienced the bulk of their run.

In related news natural gas ETFs have been on a tear, over the last 3 weeks Barclays Ipath N Gas Etn (GAZ) has gained 16.9% and United States Nat Gas Fd (UNG) has added 15.3%. Both are currently extended beyond their upper Bollinger bands, but perhaps natural gas has made a bottom.

Tech: Two weeks ago the March 3rd blog post pointed out the emerging performance of software related groups writing "Software related groups have been substandard ... however, these group's performance may be starting to turn as... 5 groups rank in the top 42 of the trailing 3 week price performance list."

The improved performance in software has continued; there are now 7 groups (out of 10 total) ranked in the top 50 of the trailing 5 week price performance list.

Over the past 2 weeks computer related groups have perked up, with 3 of 4 ranking in the top 50 groups on the trailing 2 week price performance list. Too early to make a definitive call, but perhaps the improving performance of the software groups is presaging a larger shift into tech. Note that the Cboe Technology Index gained 1% last week vs. the Nasdaq 0.1% gain.

Mortgage Servicers: The February 24th blog post noted "The Finance-Mrtg&Rel Svc group (G6151) ranks #11 in MarketSmith's industry group rankings but last week finished #197 on the 1 week price performance list with a 6.8% decline. Although most of this decline seems to be caused by two stocks (SNFCA, -30.4% for the week and CLGX, -11.5%) its none the less a cause for caution."

Those turned out to be prophetic words as last week the group lost 4% and dropped from #15 to #50 in MarketSmith's industry group rankings. Although Ocwen (OCN) has been holding up OK, Nationstar (NSM) has broken its 50 day MA and Walter Investment Managment (WAC) broke its 50 day with a vengeance in very heavy volume.

It's probably time to take profits in this group.

Follow up: LinkedIn (LNKD) was highlighted in the January 13 and January 27 blog posts, and has gained 51% from its 117.32 buy point. LNKD still shows strong accumulation with 50 day up/down volume ratio of 1.8 and a 25 day ratio of 2.0, but last week showed some interesting price action. Wednesday afternoon at exactly 1 PM  LNKD started moving higher in heavy volume and gained 1.9% for the day, closing at a new high. Investor's learned the likely reason for the move the next morning when Goldman raised its price target from $157 to $220 and called LNKD's market opportunity "under-appreciated". LNKD gapped higher Thursday but closed at its low for the day, and fell 1.3% on Friday. Goldman's apparent failure to move the stock higher suggests LNKD could begin to consolidate here.