Sector & Group Rotation Notes – 9/29/13

Listed below are notes from the author's weekly analysis.

Notice: the Sector Trends blog will not publish the next two weekends, but will return Sunday, October 20.

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 Housing Index	-1.0%	1.8%	6.0%	6.0%	1.2%	-5.7%
Philadelphia Semiconductor Index	-0.5%	0.5%	3.3%	5.8%	4.8%	12.4%
Pboe Oil Service Index	-0.4%	0.3%	1.7%	4.0%	7.6%	10.8%
Russell 2000	0.1%	1.9%	4.3%	3.5%	9.9%	12.9%
Nasdaq Composite	0.2%	1.6%	3.3%	3.4%	11.1%	15.7%
Russell 1000 Energy Index	-0.5%	0.1%	1.5%	2.8%	6.3%	4.8%
Dow Jones Transportation Index	-1.4%	1.1%	3.6%	1.8%	6.9%	5.5%
S&P 500	-1.1%	0.2%	2.2%	1.7%	5.3%	7.8%
DJIA	-1.2%	-0.8%	2.2%	1.7%	2.3%	4.7%
Cboe Technology Index	0.5%	1.3%	1.2%	0.8%	10.8%	5.3%
Philadelphia Utility Index	-0.6%	1.1%	1.7%	-0.3%	-1.7%	-5.5%
KBW Large Cap Bank Index	-1.8%	-2.0%	-1.2%	-3.8%	1.6%	10.9%
Philadelphia Gold/Silver Index	-2.1%	-2.0%	-9.0%	-15.8%	4.0%	-31.0%

Last week the markets were mixed as the S&P 500 fell 1.1%, followed by the DJIA down 1.2%. Continuing their leadership roles, both the Nasdaq and Russell 2000 outperformed gaining 0.1% and 0.2% respectively. Over the trailing 5, 13, and 26 week periods the return of the Nasdaq is more than double the return of the S&P 500, demonstrating the market’s pursuit of growth. Over shorter periods of time indexes even more tightly focused on growth, for example those focused on stocks with RS > 85, are performing at an even higher rate (copyright restrictions prevent listing details here). The superior performance of the Nasdaq & Russell 2000 also indicates improving breadth.

In economic data for the week Wednesday’s Durable Goods report was stronger than expected, and on Thursday the estimate for second quarter GDP growth was left unchanged at 2.5% vs. an expectation of 2.7%; overall the report indicated moderate growth for the second quarter. Jobless claims came in at 305K vs. 330K expected, below the 315K that was the low end of the expected range. Friday’s consumer sentiment report registered 77.5, just slightly below the 78.0 consensus, and suggested consumer’s do not yet expect major disruption from the circus in Washington.

A broader view of industry group performance shows a continued absence of defensive rotation, and a slight preference for technology oriented groups. 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	7	8	7	6	3
# in the bottom 50 groups (out of 197)	7	8	9	8	6	11

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	8	11	10	16	11
# in the bottom 50 groups (out of 197)	10	7	7	5	4	2

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	5	4	2	3	3	6
# in the bottom 50 groups (out of 197)	11	9	9	11	15	11

As mentioned last week the blog tracks 2,100 of the market’s most liquid stocks, the table below shows how stocks from that group performed when sorted by RS tier. The RS rankings were recorded at the beginning of the week, before the price performance was measured.

RS Tier	Performance:	# of stocks
90 - 99	0.93	254
80 - 89	0.51	294
50 - 79	-0.35	752
20 - 49	-0.72	564
1 - 19	-1.45	230
Avg. Gain	-0.30

The table below takes a closer look at stocks in RS tiers 90 – 99 and 80 – 89, sorting them by EPS tier. For both RS tiers the strongest performance is coming from the lowest EPS tier 1 – 19.

It’s important to note that the 4.83% return in the RS 80 – 89, EPS 1 – 19 tier was impacted by the buyout offer for MAKO, which gained 80% for the week (MAKO was highlighted in the June 2 and August 4 Sector Trends blog posts). If you back out MAKO’s 80% gain, the RS 80 – 89 tier gained only 0.24%, and the 4.83% return in the RS 80 – 89, EPS 1 – 19 tier drops to 1.24%.

Stocks with RS 80 - 99
EPS Tier	Performance:	# of stocks
RS 90 - 99	0.93	254
EPS 90 - 99	0.69	57
EPS 80 - 89	0.72	19
EPS 50 - 79	1.43	67
EPS 20 - 49	0.22	66
EPS 1 - 19	1.60	45
RS 80 - 89	0.51	294
EPS 90 - 99	0.15	73
EPS 80 - 89	0.07	56
EPS 50 - 79	0.27	95
EPS 20 - 49	0.05	48
EPS 1 - 19	4.83	22
Average:	0.70

Among the high relative strength group, those stocks with the lowest EPS rankings, i.e. the most speculative, are performing best. Investors are pursuing growth ahead of value or income, and the data suggests they will continue to do so.

The circus in Washington will probably introduce volatility, and could result in lower prices early in the week. But investor response to date has been muted, suggesting a “been there, done that” perspective on events, suggesting any pullback will be temporary. This is a strong bull market and until the data suggests otherwise, it appears the trend is higher. Investors focused on stocks with RS > 90 should perform well.

Industry Group Performance:

Finance: The Finance-Commercial Loans group has been a strong performer ranking #12 on the trailing 5 week price performance list with an 8.1% gain. Over the same 5 week period the group’s MarketSmith industry group rank has jumped +30 to #117 overall.

Regional Management Corp. (RM) is a thin name with an average daily volume of only 85K. However, despite completing a secondary offer less than 2 weeks ago, RM has broken out of cup & handle pattern and with its RS line at a new high. RM trades at 15 times earnings, and analysts forecast FY ’13 EPS +13%, and FY ’14 EPS +24%. RM has an “A-“ A/D rating, and ROE of 29%. Institutional sponsorship from 100 funds to 114 over the last quarter, and RM has strung together 8 consecutive quarters of +20% sales growth. RM presents at the JMP Securities Financial Services and Real Estate conference this Tuesday, and performance after that event could provide further insight into RM’s likely direction. You can read more here.

Retail: The Retail-Specialty group is ranked #18 on the trailing 5 week price performance list with a 7.3% gain, and over the same period of time has jumped +57 in MarketSmith’s industry group rankings to #70 overall.

GNC Holdings (GNC) is flirting with a 54.69 pivot out of a 7 week flat base. GNC is seeing healthy accumulation with a “B” A/D rating, 50 day up/down volume ratio of 1.4, and a 25 day ratio of 1.9. Institutional sponsorship has increased steadily over the past 8 quarters, increasing from 500 to 544 over the last quarter alone. RS 87, EPS 94, ROE 26%.

Growth: The Sector Trends blog has been beating the drum for growth stocks for quite some time now – here are a few to consider.

Celegene (CELG) was highlighted in last week’s blog: “Celgene (CELG) is a biotech with a solid quarterly sales and earnings increases. CELG is showing strong accumulation with a "B+" A/D rating, 50 day up/down volume ratio of 1.5, and a 25 day ratio of 1.8. CELG looks good right here.” On Friday CELG broke through its pivot with authority gaining 3.1% on volume 68% above average. CELG is still within the 5% buy zone.

Sunpower Corp. (SPWR) gained 8.3% last week and has its RS line hitting a new high ahead of price. SPWR is showing strong short term accumulation with a 25 day up/down volume ratio of 1.8, the 50 day ratio is 1.0. A/D “B”, and institutional sponsorship has increased 199 > 246 > 287 over the past 2 quarters. Negatives include ROE of only 2%, and analyst FY ’14 EPS estimate of 0% growth. Regardless, SPWR has momentum and looks like its headed higher.

Rex Energy (REXX) is another repeat from last week. REXX has set up out of a 6 week flat base with a 22.08 pivot. Sales have ramped +27%, +42%, +40%, +83% over the past 4 quarters. Analysts forecast FY '13 EPS +103%, FY '14 +79%. REXX evidences strong short term accumulation with a 25 day up/down volume ratio of 2.1, a delta of 0.9 over the 50 day ratio.  Another factor in its favor is the strong performance of the Oil&Gas-U S Expl&Prod industry group, which ranks #15 on the trailing 13 week price performance list with a 19.4% gain, and has jumped +67 in MarketSmith’s industry group rankings to #20 overall over the same time period.

Angie’s List (ANGI) recaptured its 50 day MA last week in heavy volume and looks attractive as a purchase right here. The 25 day up/down volume ratio is leading the 50 day ratio 1.6 to 1.2, institutional sponsorship has exploded higher 150 > 188 > 260 over the last two quarters; and volume is ramping higher on the weekly chart. ANGI has had 8 straight quarters of 60%+ sales increases.

Pinnacle Entertainment (PNK) has just completed a 4 weeks tight formation as its Bollinger Bands have tightened. PNK is seeing accumulation with an “A-“ A/D rating, 50 day up/down volume ratio of 1.6. Analysts estimate FY ’13 EPS +47%, FY ’14 +116%.

Valeant Pharmaceutical (VRX) was highlighted each of the past two weeks, this makes it three. VRX has a PE of 21 with analysts forecasting FY '13 EPS +36%, and FY '14 EPS +40%. Quarterly sales and EPS results have been explosive, and VRX is seeing strong accumulation with a "B+" A/D rating and a 50 day up/down volume ratio of 1.7. Institutional sponsorship increased from 981 to 1053 funds over the past quarter. RS 92, EPS 95, ROE 37%.