Sector & Group Rotation Notes – 8/11/13

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 Gold/Silver Index	3.7%	-3.2%	3.0%	13.0%	-10.0%	-35.9%
Nasdaq Composite	-0.8%	1.3%	2.0%	5.2%	6.5%	14.6%
Cboe Technology Index	-0.9%	1.4%	2.6%	5.1%	2.3%	3.7%
Philadelphia Utility Index	-1.1%	-0.7%	-1.3%	5.0%	-2.6%	5.8%
Russell 2000	-1.1%	0.0%	-0.2%	4.3%	7.5%	14.7%
SP 500	-1.1%	0.0%	0.0%	3.6%	3.5%	11.4%
Dow Jones Transportation Index	-2.6%	0.1%	-1.6%	3.0%	1.6%	9.6%
Russell 1000 Energy Index	-1.1%	-1.1%	-1.9%	2.7%	2.4%	4.3%
KBW Large Cap Bank Index	-2.4%	-1.0%	-1.1%	2.2%	11.6%	18.8%
DJIA	-1.5%	-0.9%	-0.8%	1.9%	2.0%	10.2%
Pboe Oil Service Index	-1.4%	0.3%	-3.1%	1.0%	1.5%	6.1%
Philadelphia Semiconductor Index	-2.4%	-0.3%	-3.0%	-0.9%	1.2%	11.1%
Philadelphia Housing Index	-4.7%	-2.1%	-7.0%	-1.2%	-15.3%	-7.0%

Last week the Nasdaq picked up two more distribution days, and the S&P 500 picked up one as it dropped back under the 1700 level. Despite the distribution the more speculative Nasdaq continues to lead the S&P 500, although the Russell 2000 has started to lag slightly over the trailing 3 weeks.

Economic data for the week was light. Monday's ISM Non-Mfg Index exceed expectations with a reading of 56 versus a consensus range of 52 - 54.5, its best reading since February. Thursday's jobless claims came in 3K below expectations, and the 4 week average hit a new recovery low.

Economic data from China helped spark commodities as industrial output grew 9.7% in July YOY (9.0% expected) after a weak 8.9% increase in June. Barclay's Copper ETF gained 4.8% for the week and broke higher through a 26 week long descending trend line. Some laggard industry groups responded with solid weekly gains as seen in the table below:

		Price Performance			MarketSmith Ind. Group Rank
Industry Group	Symbol	1 Week Gain	1 Week Rank		Sat 8/10/13
Mining-Metal Ores	G1099	3.7%	5		196
Energy-Coal	G1319	3.7%	6		185
Steel-Specialty Alloys	G3313	3.1%	10		187
Steel-Producers	G3312	2.4%	11		166

Last week was the last "big" earnings week with1,137 companies reporting, next week only 387 report. Winners for the week included Bitauto +34%, Orbitz +27%, CaesarStone +27%, Ubiquiti Networks +27%, Groupon +22%, Tableau Software +13%, Soufun +11%, Tesla +11%, Zillow +8%, Priceline +6%, Jazz +6%, and Fossil +5%.

Major losers included Nautilus -26%, Silicon Graphics -24%, Fusion-Io -23%, Mcdermott Intl -18%, First Solar -13%, Tumi -13%, and Diodes -12%.

Last week's earnings announcements were especially heavy in the energy sector with 37.3% of companies reporting, and specifically for the Oil&Gas-U S Expl&Prod group which had 54% of its constituent companies reporting. In the medical sector 32.4% of companies reported, led by the Medical-Biomed/Biotech group with 36.5% of its constituent companies reporting.

Both sectors disappointed. In the Energy sector the 162 companies reporting finished the week with an average loss of 2.4%, and only 32.7% of the companies reporting managed to finish the weak with a positive gain. In the medical sector the 188 companies reporting finished with an average weekly loss of 2.7%, and only 38% finished the week positive. Earnings from the Medical-Biomed/Biotech group were poorly received; the 94 companies reporting averaged a 2.97% loss, and only 27 of the 94 companies (29%) managed to finish the week with positive price performance.

387 companies report next week including Walmart, Cisco, TJX, Deere, Applied Materials, Netapp, Valspar, Flowers Foods, and J D S Uniphase. There are 165 China based stocks in the MarketSmith database, 59 of them report earnings next week including Jinkosolar, Dangdang, Renren, Vipshop Holdings, Nq Mobile, Sina, and Netease. LightInTheBox (Hong Kong) also reports.

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

Trailing group performance suggests a slight preference for technology themed groups. Commodity themed groups improved from the previous week as a result of China's economic data referenced above.

Conclusion: Despite 7 distribution days the Nasdaq continues to lead the S&P 500 in relative strength, and is less than 1% from its most recent high. Economic data shows consistent improvement and there are few signs of defensive rotation. Rising yields should result in additional funds rotating to equities, and increase investor appetite for growth stocks. The view here is that a major pullback in equities is unlikely, and odds are the market moves higher after a period of consolidation. Growth oriented equities should perform particularly well.

 

Industry Group Performance:

Alcohol: The Beverages-Alcoholic group (G2085) is starting to run. On the trailing 3 week price performance list the group ranks #18 with a 6.1% gain and has jumped +58 in MarketSmith's industry group ranks to #78 overall. On the trailing 26 week price performance list the group ranks #15 with a 31.6% gain.

Brown Forman (BFB) is a slow but steady climber that looks poised to move higher. BFB sports an "A-" A/D rating, 50 day up/down volume of 1.3, and a 25 day ratio of 2.5. Institutional sponsorship has increased 707 > 726 > 724 > 756 over the trailing 4 quarters, ROE of 32%, and a 1.4% dividend yield. Technically BFB has a 73.71 pivot out of a cup & handle base, as well as 5 weeks of tight trading (BB volatility squeeze too).

Business Services: The Comml Svcs-Healthcare group (G3441) has been on a tear. The group ranks #27 on the trailing 13 week price performance list with a 15.9% gain, and over the same period of time has jumped +138 in MarketSmith's industry group rankings from #168 to #30.

Team Health Holdings (TMH) has a 42.42 pivot out of a 7 week flat base. RS 75, EPS 90, ROE 162%, A/D "B". Institutional sponsorship has increased 299 > 337 > 390 > 400 over the trailing 4 quarters.

 

Finance: The Finance-Mrtg&Rel Svc group (G6151) is ranked #24 on the trailing 3 week price performance list with a 5.6% gain, and over the same 3 week period has jumped +44 in MarketSmith's industry group rankings from #97 to #53.

Portfolio Recovery Associates (PRAA) has a 54.62 pivot out of an 8 week consolidation and is showing evidence of heavy accumulation. A/D rating "B+", up/down volume 1.4, and institutional sponsorship has increased 343 > 357 > 389 > 414 over the last 4 quarters. RS 87, EPS 98, ROE 19%.

 

Healthcare: Despite the disappointing reaction to earnings in the sector last week, three industry groups from the sector are showing improved performance in both price and group rank.

		Price Performance			MarketSmith Ind. Group Rank
Industry Group	Symbol	3 Week Gain	3 Week Rank		Rank	3 Wk Delta
Medical-Services	G1044	4.4%	34		72	+24
Medical-Outpnt/Hm Care	G1031	3.8%	40		69	+44
Medical-Whlsle Drg/Suppl	G5022	6.6%	14		104	+33

Catamaran (CTRX) announced quarterly results August 1 and beat 0.49 vs. 0.44. Check out the strong quarterly results on the chart below, as well as the robust analyst EPS estimates.