Sector & Group Rotation Notes – 3/24/13

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.

Index	1 Week Gain	2 Week Gain	3 Week Gain	5 Week Gain	13 Week Gain	26 Week Gain
Philadelphia Utility Index	0.1%	1.4%	2.8%	4.9%	8.1%	5.0%
Dow Jones Transportation Index	-1.5%	0.6%	3.2%	3.9%	15.7%	25.8%
DJIA	0.0%	0.8%	3.0%	3.8%	10.0%	6.9%
KBW Large Cap Bank Index	-1.6%	0.1%	4.6%	2.7%	10.4%	12.7%
Russell 2000	-0.7%	0.4%	3.4%	2.5%	11.6%	10.6%
SP 500	-0.2%	0.4%	2.5%	2.4%	8.9%	6.6%
Cboe Technology Index	0.6%	1.7%	3.9%	2.3%	4.0%	-8.0%
Nasdaq Composite	-0.1%	0.0%	2.4%	1.7%	7.4%	2.0%
Philadelphia Housing Index	0.8%	1.3%	5.8%	1.0%	13.3%	15.6%
Russell 1000 Energy Index	-1.0%	0.2%	1.6%	0.8%	8.2%	4.1%
Philadelphia Semiconductor Index	-0.9%	-1.2%	1.2%	0.4%	11.5%	8.8%
Philadelphia Gold/Silver Index	1.9%	2.7%	2.8%	-4.8%	-14.6%	-29.8%
Pboe Oil Service Index	-4.0%	-2.1%	-0.8%	-4.9%	8.4%	2.3%

Europe returned to prominence last Sunday evening when Cyprus announced its intention to seize a portion of depositor's assets in an effort to recapitalize its failing banks. Both the Nasdaq and NYSE picked up distribution days on Tuesday once it became obvious the issue would not be quickly resolved.  The Nasdaq picked up an additional distribution day on Thursday giving it 4 distribution days over the last 9 trading sessions, 5 or 6 over 2-3 weeks represents a high risk environment. Despite the 2 distribution days the Nasdaq finished the week off only 0.1%.

Economic data continued to be mostly positive. Housing data released Tuesday showed a sizeable jump in permits, increasing 4.6%. Wednesday's FOMC announcement indicated a continuation of asset purchases and with a diminution beginning only after warranted by economic conditions. Thursday saw positive releases as well with the four week jobless claims average hitting a new post recovery low. Existing home sales data was positive, and the Philadelphia Fed Survey of general business conditions came in at +2.0 vs. a consensus expectation of -1.5.

On a negative note Monday's NAHB Housing Market Index came in at 44, missing the consensus expectation of 47. The NAHB commentary mentioned supply chain bottle necks and problems with appraisals and credit availability as reasons. You can read the complete NAHB commentary here.

Despite the positive data the defensive rotation noted immediately below, combined with the pickup in distribution days suggests now is a good time to tighten up stops.

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)	6	5	7	4	7	8
# in the bottom 50 groups (out of 197)	14	10	6	13	11	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)	4	3	3	5	6	0
# in the bottom 50 groups (out of 197)	12	14	11	10	11	15

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

Defensive groups led last week and are now outperforming over the 1, 2 and 5 week time periods. Commodity oriented groups were led lower by energy, and tech oriented groups saw poor performance from semis and electronics related groups.

In another indication of the defensive tilt in the market last week the SPDR Consumer Staples ETF (XLP) gained 2.1% while the SPDR Consumer Discretnry ETF (XLY) picked up only 0.1%.

Industry Group Performance:

Energy: Energy related groups took it on the chin last week after Schlumberger’s Monday presentation at the Howard Weil Energy Conference where they indicated North American activity was below expectations and that customers were activating fewer rigs than expected.

Along with Cyprus this had a negative impact on the sector and 7 energy related groups finished in the bottom 50 of the 1 week price performance list with losses ranging from -1.7% to -4.8%. Groups related to production and services (basically the same groups that appeared ready to move higher last week) bore the brunt of the damage.

It’s likely these groups will now need to consolidate a bit before attempting to move higher.

Apparel: The Apparel-Shoes & Rel Mfg industry group (G3141) has been a laggard but ranks #37 on the trailing 3 week price performance list with a 5% gain and over the same time period has jumped +33 in MarketSmith’s industry group rankings to #139.

Nike (NKE) released earnings Thursday AMC and beat 0.73 vs. 0.67, with sales of 6.2B meeting consensus estimates. Nike indicated an increase in gross margin due to “easing material costs, which more than offset higher labor costs.”

Skechers (SKX) has an “A” Accumulation/Distribution rating and an up/down volume ratio of 1.5. FY ’13 EPS are forecast +442%, and FY ’14 +39%. SKX has a 22.61 pivot out of a 5 week flat base. Another week or two trading within the range of this base should result in an attractive Bollinger Band squeeze.

Wolverine World Wide (WWW) is 1% past its pivot out of a 7 month cup & handle base:

Telecom: The Telecom Svcs-Integrated industry group (G4891) is another underperforming group starting to show signs of life. The group ranks #9 on the trailing 5 week price performance list with an 8.3% gain and over the same period of time has moved +16 to #169 in MarketSmith’s industry group rankings.

Eight By Eight (EGHT) has a “B-“ Accumulation/Distribution rating and a paltry 0.8 up/down volume ratio. However, analysts forecast FY ’13 EPS +54% and FY ’14 EPS +40%. EGHT has seen decent accumulation over the past 3 weeks after being upgraded to “outperform” by Northland Securities. EGHT has a 7.95 pivot out of an 8 week consolidation.