Sector & Group Rotation Notes – 8/18/13

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	11.9%	16.0%	8.3%	22.0%	12.1%	-24.1%
Cboe Technology Index	1.8%	1.0%	3.3%	4.6%	4.6%	6.5%
KBW Large Cap Bank Index	-0.9%	-3.3%	-1.9%	0.3%	5.9%	17.4%
Nasdaq Composite	-1.6%	-2.4%	-0.3%	0.1%	3.0%	12.9%
Dow Jones Transportation Index	-1.6%	-4.2%	-1.5%	-1.0%	-2.7%	7.2%
Russell 2000	-2.3%	-3.4%	-2.3%	-1.2%	2.8%	11.0%
S&P 500	-2.1%	-3.1%	-2.1%	-1.4%	-0.7%	9.0%
Russell 1000 Energy Index	-1.8%	-2.9%	-2.8%	-1.5%	-1.3%	3.0%
DJIA	-2.2%	-3.7%	-3.1%	-2.5%	-1.8%	7.9%
Pboe Oil Service Index	-1.5%	-2.9%	-1.1%	-2.7%	-1.7%	3.1%
Philadelphia Utility Index	-5.0%	-6.0%	-5.6%	-4.5%	-8.0%	0.9%
Philadelphia Semiconductor Index	-2.0%	-4.3%	-2.3%	-5.5%	-1.7%	7.9%
Philadelphia Housing Index	-1.0%	-5.6%	-3.1%	-8.4%	-17.8%	-10.3%

Last week the markets continued their modest pull back with most of the damage occurring Thursday when "taper" fears helped to accelerate selling. For the week the S&P 500 fell 2.2%, the Russell 2000 fell 2.3%, but the tech heavy Nasdaq declined only 1.6%.

The Sector Trends blog has noted the improving performance of tech related groups for the past several months and that continued this past week.  The Cboe Technology Index actually gained 1.8%, helped along by Apple's 27% weighting and 10.5% weekly gain. But even when you back out Apple's outsized performance the index fell only 1.5%; 40% less than the S&P 500's decline.

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	9	8	4	2	2
# in the bottom 50 groups (out of 197)	5	4	6	5	10	13

28 Technology Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	12	11	10	13	11	8
# in the bottom 50 groups (out of 197)	6	4	1	4	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)	1	7	5	5	5	7
# in the bottom 50 groups (out of 197)	14	14	12	8	7	3

As the table shows tech related groups continue to perform well over the trailing 1 to 13 week time periods, while defensively oriented groups are performing relatively poorly.

Thursday's distribution day has led some to call this a "market in correction". The Sector Trends blog disagrees with this market view and suggests readers look at this as a "market in rotation". The data in the table above shows institutional investors using this weakness to dump defensive groups (utilities fell 5% last week) and move money into more growth oriented groups. Last week the yield on the 10 year Treasury hit a two year high, and tapering will lead to additional bond losses, and further rotation from bonds to equities. The view here is though the road may be bumpy a major pullback in equities is unlikely, and odds favor the market moving higher after a period of consolidation. Growth oriented equities should perform particularly well, especially those with high RS and EPS rankings.

Industry Group Performance:

Autos: Over the last 5 weeks all 5 Auto related groups rank in the top 45 of the trailing 5 week price performance list . But last week the Auto Manufacturers group (G3711) fell 6.5% to rank #196 on the trailing 1 week price performance list. It's important to remember that MarketSmith industry group indices are price-weighted averages so Tesla's 7.2% decline inflicts quite an impact given its $142 price, but none the less Ford also fell 4.2%, and General Motors declined 4.6%. The table below shows the weekly price performance of the 9 stocks in the group:

Symbol	Name	Current Price	% Chg Cur Week
TSLA	Tesla Motors Inc	142.00	-7.2
GM	General Motors Company	34.38	-4.6
F	Ford Motor	16.30	-4.2
NSANY	Nissan Motor Co Adr	21.22	-1.6
VLKAY	Volkswagen A G Adr	47.45	0.9
TM	Toyota Motor Corp Adr	128.88	1.0
HMC	Honda Motor Co Ltd Adr	38.68	1.5
DDAIF	Daimler A G	73.80	1.6
TTM	Tata Motors Ltd Ads	25.12	7.1

It's unlikely this one week's action reflects an end to the strong performance the group has delivered, but is something to keep an eye on.

Other auto-related groups performed well last week with the Auto/Truck-Replace Parts group finishing #7 with a 1.1% gain, the Auto/Truck-Original Equip group finished #16 with a 0.1% loss, and the Trucks & Parts-Hvy Duty group #38 with a 0.9% loss.

The Trucks & Parts-Hvy Duty group (G1010) has been something of a laggard in the sector, but that could be starting to change. The group ranks #146 in MarketSmith's industry group rankings (+24 over 5 weeks), but ranks #38 on the trailing 5 week price performance list with a 3.4% gain.

On July 30 Oshkosh Corp. (OSK) blew out earnings (1.67 vs. 1.08), revenues (2.2B vs. 2.1B) and raised its FY13 guidance to $3.60-$3.70, vs. consensus $3.15 stating "Our strong fiscal 2013 performance... gives us confidence as we strive to reach our fiscal 2015 earnings per share target range of $4.00 to $4.50, in spite of the expected decline in our defense business in fiscal 2014". Shares moved higher in heavy volume and could be appealing with a break of the descending trend line.

Tower International (TOWR) has dropped below its 50 day MA and is 6% below 21.25 pivot out of an 8 week consolidation, apparently as a result of a secondary offer that was consummated July 25. But despite this performance TOWR maintains a "B+" A/D rank, and has seen solid institutional sponsorship gains over the last 3 quarters 98 > 104 > 117, with an "A" sponsorship rating. FY '13 EPS are forecast +79%, and FY '14 +27% giving TOWR a forward PE of ~ 8 when measured against FY '14 estimates. TOWR would be attractive bouncing off a retest of the 19.10 low from 4 weeks back.

Software: 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."

At the time there wasn't a single software group ranked in the top 100 of MarketSmith's industry group rankings; today there are 5 software related groups ranked in the top 50. Groups from the sector turned in another strong performance last week with 6 groups ranked in the top 50 of the trailing one week price performance list.

On August 9 Tableau Software (DATA) announced earnings that crushed expectations: EPS (0.01) vs (0.17) and revenues of 49.9M vs. 42.7M consensus.  “We are pleased with our performance in the second quarter,” said Christian Chabot, CEO and President. “We grew total revenues 71 percent from the prior year second quarter, and we added over 1,500 new customer accounts. Our business continues to experience strong momentum, as customers use Tableau’s software to turn data into revealing insights and stories.” DATA would look attractive on a pullback closer to $63.

On August 6 Demandware (DWRE) Jumped 6.4% in volume 60% above average. AMC DWRE reported and although they beat analyst expectations (Q2 EPS (17c), consensus (21c) and revenue of  $23.2M vs. consensus $22.2M) DWRE gave it all back the next day when it declined 9.8% in volume 335% above average. Since then DWRE chart action has stabilized, and maintains a strong "B+" A/D rating. DWRE shares would be attractive on a break above 47.70.

On August 1 Elli Mae (ELLI) reported EPS that met expectations and increased guidance, jumping 16% on a 375% increase in volume the next day. On August 8 Bloomberg reported Elli Mae (ELLI) was considering a sale, and investment bank Maxim estimated a takeout valuation of $29 to $38 per share. This robust reaction to earnings suggests a level of support for ELLI regardless of the outcome of any sale efforts. ELLI could merit consideration with a break of the short descending trend line seen in the chart below.

Servicenow (NOW) has seen heavy buying after a low volume test of the 50 day moving average and appears headed higher. NOW is under accumulation with institutional sponsorship increasing 199 > 322 > 343 > 376 over the past 4 quarters.

 

 

Media: Media related groups have been strong performers with three groups from the sector ranked in the top 33 of MarketSmith's industry group rankings. That could be changing as last week 4 of the groups ranked in the bottom 20 of the trailing 1 week price performance list with losses ranging from -3.9% to -10.9%. The Media-Radio/Tv group (G4830) has a MarketSmith industry group rank of #18 but ranks #193 on the trailing 5 week price performance list with a 9.7% loss, led by declines in Nexstar (NXST), Sinclair (SBGI), and to a lesser extent Saga (SGA). Last week's performance is shown in the table below:

		Price Performance			MarketSmith
Industry Group	Symbol	1 Week Gain	1 Week Rank		Group Rank
Media-Diversified	G2712	-2.2%	113		33
Media-Books	G2731	-3.9%	180		89
Media-Radio/Tv	G4830	-4.0%	183		18
Media-Newspapers	G2711	-5.6%	194		7
Media-Periodicals	G2721	-10.9%	197		134