Sector & Group Rotation Notes – 6/16/13

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. 

New readers, or readers unfamiliar with some of the technical data points referenced by the blog, may wish to review the glossary. The glossary is by no means comprehensive, but covers the data points referenced most frequently by the Sector Trends blog.

A new feature added this week is the "search this blog" field to the right, enter a ticker to find mentions of it in previous blog posts.

A friend of the blogs has started a chat room that may be of interest to readers. The room owner is very well versed in CANSLIM trading, and through his extensive contacts has assembled a room of high quality participants. It's not free, and there are no free trials, so the quality should remain high. Click here if you're interested in learning more.

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
KBW Large Cap Bank Index	-2.3%	-2.3%	-1.2%	2.8%	4.6%	22.1%
Russell 2000	-0.6%	-0.3%	-0.3%	0.6%	3.0%	19.1%
Philadelphia Semiconductor Index	-1.3%	-0.7%	0.9%	-0.1%	7.2%	22.2%
DJIA	-1.2%	-0.3%	-1.5%	-0.3%	3.8%	14.7%
Nasdaq Composite	-1.3%	-0.9%	-1.0%	-0.4%	5.4%	15.2%
SP 500	-1.0%	-0.2%	-1.4%	-0.4%	4.2%	15.1%
Russell 1000 Energy Index	-1.7%	-0.8%	-2.2%	-0.8%	-0.3%	10.4%
Dow Jones Transportation Index	-0.5%	0.3%	-1.3%	-1.0%	0.6%	21.6%
Cboe Technology Index	-2.0%	-2.0%	-1.2%	-2.0%	-1.5%	3.3%
Pboe Oil Service Index	-1.8%	-0.2%	-2.4%	-2.5%	1.4%	18.1%
Philadelphia Gold/Silver Index	-2.9%	-4.4%	2.0%	-5.5%	-23.7%	-37.7%
Philadelphia Utility Index	-0.3%	-0.6%	-4.0%	-6.7%	-3.0%	6.0%
Philadelphia Housing Index	-0.1%	-3.9%	-6.8%	-7.1%	-0.9%	15.7%

Last week saw more volatility in the markets with consecutive down days Tuesday and Wednesday countered by a bullish engulfing day Thursday. In another positive sign for the market the major indexes were led by the Russell 2000, which fell only 0.6% on the week compared to a 1% decline for the S&P 500. Another popular index which focuses on stocks with both RS and EPS 85+ declined only 0.3%.

The last two weeks analysis has indicated a rotation into tech oriented industry groups, this past week saw defensive groups begin to outperform. 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)	5	4	3	3	3	4
# in the bottom 50 groups (out of 197)	14	13	14	10	14	14

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

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	14	14	9	8	10	7
# in the bottom 50 groups (out of 197)	2	2	3	6	2	6

However, the correct interpretation of defensive rotation is a function of both the rotation and market price action. In this case the rotation is coming late, after a significant number of distribution days - suggesting it isn't the "smart" money.

For the last three weeks the Sector Trends market view has been a variation of "the markets could see additional volatility but a serious pullback is not imminent" and for the last three weeks that's been the right call. This view is also supported by the performance of the stocks highlighted in last week's analysis: those stocks which either hit their buy points, or were already past their buy points, gained 2.2%. Winners included INVN +10.2%, SREV +9.2%, MTDR +6.7%, and nice break outs from both TNGO and SN, each up +3.7%.

This week's market view: The markets could see additional volatility but a serious pullback is not imminent. The turbulence is a reaction to Fed "tapering" talk, and is manifesting itself in the market by a rotation from yield to growth.

That said, the FOMC meets next week and will release its announcement and forecasts 2 PM Wednesday. Short term reaction could be extreme +/-, although a "status quo" message will likely have a very bullish impact.

Industry Group Performance:

Housing: Housing/building related industry groups have taken it on the chin since "taper" talk broke out. Over the last 3 weeks the Philadelphia Housing Index is off -6.7%, but Thursday's 3.9% rally suggests underlying demand. Next week's calendar provides two potential catalysts with the Housing Market Index data coming out 10 AM Monday, and the FOMC announcement Wednesday afternoon. Let's give this sector a look in the event these announcements are positive.

Hovnanian's (HOV) current consolidation was first highlighted in the 5/26 blog. At the time HOV had a "B+" A/D rating and 50 day up/down volume of 1.1; today those values are "A-" and 1.7. HOV has developed into a nice Bollinger Band volatility squeeze, and the price action combined with the ramping volume suggests it wants to move higher.

This TC2000 chart shows the BB squeeze:

Great Lakes Dredge & Dock is another name from the sector under accumulation with an "A-" A/D rating and 50 day up/down volume of 2.1. GLDD has an 8.48 pivot out of this cup & handle pattern as seen on this MarketSmith chart; the TC 2000 chart that follows shows the handle developing a BB volatility squeeze - a twofer!

PGT Inc. (PGTI) sank 12.8% over two days in late May after announcing and completing a secondary offer. Since that time, however, PGTI has seen steady accumulation in tight trading. A/D "A-", and institutional sponsorship has increased 83 > 97 > 105 > 123 over the trailing 4 quarters. FY' 13 EPS are forecast +119%, and FY '14 +29%. Sales have increased +27% and +30% the last two quarters. PGTI looks like a buy above 8.60.

The May 12th blog post noted the following: "The Bldg-Mobile/Mfg & Rv industry group (G3791) ranks #180 in MarketSmith's industry group rankings but is demonstrating strong short term price performance. The group ranks in the top 50 of the trailing 1, 2, 3 & 5 week price performance lists, coming in at #34 on the 5 week list with a 9.4% gain. The group has a 50 day up/down volume ratio of 1.4, ranking #33 in this metric out of 197 groups." Since then the group has jumped in MarketSmith's industry group rankings +146 from #180 to #34, has a "B+" A/D rating, and the up/down volume ratio has held steady at 1.4.

Drew Industries (DW) is under accumulation with an "A-" A/D rating, up/down volume of 1.6, and institutional sponsorship increases of 232 > 243 > 259 > 270 over the past 4 quarters. Analysts forecast FY '14 EPS +48%. DW is currently 3% past a 38.82 pivot out of a 15 week flat base.

Healthcare: Health and medical related industry groups have been improving. Although only 3 of the 14 related groups are in the top 50 of MarketSmith's industry group ranks, 8 of 14 are in the top 50 of the trailing 13 week price performance list.

Nxstage Medical (NXTM) was featured in the blog two weeks ago and it still looks good here. NXTM is a medical device company whose primary product, the NxStage System One, is a portable dialysis machine useable by lay people at home. NXTM is 17.5% off its 52 week high, and is almost 50% off its all time high, but has seen strong price gains in heavy volume since announcing 1st quarter results May 2.  NXTM looks like a buy on a move over 14.37.

Icon plc (ICLR) provides contract clinical research services to various medical industries. ICLR has a "B" A/D rating, an up/down volume ratio of 1.5, and institutional sponsorship has increased 125 > 130 > 193 > 202 over the last 4 quarters. FY' 13 EPS are forecast +56%, FY '14 +20%, and check out those sales & EPS increases on the chart. ICLR's RS is at a new high, and the stock is currently 0.04 below a 35.57 buy point out of a 7 week stage 2 cup & handle base.

Pacira Pharmaceuticals (PCRX) is a member of the Medical-Biomed/Biotech group (G8063), a group which has been among the top 50 ranked groups since April 2 2011! PCRX recently announced findings from the completed first part of its Phase 2/3 clinical trial assessing the use and administration of Exparel supported initiation of the Phase 3 portion of the pivotal trial. Results from this additional Phase 3 study will contribute to a planned FDA submission anticipated for early 2014. PCRX is seeing decent accumulation, and has a 30.94 pivot out of this flat base.

Software: Over the past 5 weeks the Comp Sftwr-Spec Enterprs industry group (G2761) has gained 6%, ranking #18 on the trailing 5 week price performance list, and jumped +95 in MarketSmith's industry group ranks from #123 to #28. The best looking set ups from this group, TNGO, JIVE, and SREV, have all been covered here previously, most recently in last week's analysis. All three still look attractive at current levels.

 

 

Verint Systems (VRNT) was also highlighted last week and developed into a cup and handle pattern over the past week, pivot point 35.64.

On a negative note, the Computer Sftwr-Gaming group (G3584) ranks #13 in MarketSmith's industry group rankings, but ranks #180 on the trailing 5 week price performance list with a 4.6% loss. The group A/D rating is a poor "D+", and the up/down volume ratio is 0.6, #196 among all groups.

Restaurants: The Retail-Restaurants group (G5812) has a #12 MarketSmith industry group rank and ranks #23 on the trailing 13 week price performance list with a 11.7% gain.

Burger King Worldwide (BKW) is breaking out of an 11 week flat base and is currently 2% past its pivot. Accumulation has been strong with an "A-" A/D rating, 50 day up/down volume ratio of 1.5, and increasing institutional sponsorship. On its April 26 conference call BKW increased its dividend by 20% and announced a $200M share repurchase program.