Sector & Group Rotation Notes – 9/1/13

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	-7.1%	-5.3%	5.9%	2.5%	-3.6%	-22.4%
Cboe Technology Index	-2.2%	-2.3%	-0.5%	0.9%	1.9%	5.7%
Nasdaq Composite	-1.9%	-0.4%	-1.9%	-0.6%	3.9%	13.3%
Pboe Oil Service Index	-1.9%	-1.2%	-2.7%	-2.3%	1.1%	6.3%
Russell 1000 Energy Index	-0.2%	0.3%	-1.5%	-2.6%	0.9%	4.1%
Philadelphia Semiconductor Index	-1.3%	-1.0%	-3.0%	-3.3%	-2.3%	7.7%
Dow Jones Transportation Index	-3.5%	-2.0%	-3.5%	-3.4%	-0.6%	4.4%
S&P 500	-1.8%	-1.4%	-3.5%	-3.5%	0.1%	7.6%
Russell 2000	-2.6%	-1.3%	-3.6%	-3.6%	2.7%	10.5%
DJIA	-1.3%	-1.8%	-4.0%	-4.8%	-2.0%	5.1%
Philadelphia Housing Index	-2.1%	-2.4%	-3.4%	-5.4%	-15.4%	-8.4%
KBW Large Cap Bank Index	-4.2%	-3.9%	-4.8%	-5.7%	1.0%	14.9%
Philadelphia Utility Index	-1.1%	-0.3%	-5.3%	-5.9%	-1.7%	-1.5%

Last Monday started with a bang as the indexes got off to a strong start only to falter when Secretary of State Kerry spoke at 2 PM regarding Syria. Stocks fell hard in the last hour of trading, setting the tone for most of the rest of the week.

Despite the poor performance the Nasdaq remains only 2.8% off its recent high, suggesting the market remains in consolidation. But on the other hand last week’s 2.6% loss by the Russell 2000 put it firmly below its 50 day MA, and gives it weaker relative strength vis-à-vis the S&P 500 over the trailing 5 weeks suggesting movement out of more speculative issues.

The table below shows select indexes distance from their most recent highs.

Index	% off high
Nasdaq Composite	-2.8%
Russell 1000 Energy Index	-3.7%
Cboe Technology Index	-3.8%
S&P 500	-4.5%
Russell 2000	-4.9%
DJIA	-5.4%
Pboe Oil Service Index	-6.1%
Dow Jones Transportation Index	-6.5%
Philadelphia Semiconductor Index	-7.2%
KBW Large Cap Bank Index	-7.3%

The strongest stocks (leaders) held up best last week. The table below reflects price performance for the trailing week by RS range, as the data shows those stocks with RS 90+ easily outperformed all others (from a database of 2,100 stocks tracked by the Sector Trends blog).

RS Range	Weekly Performance
90-99	-0.96
80-89	-2.35
50-79	-2.47
20-49	-2.15
1-19	-2.63
Grand Total	-2.21

Economic data last week was mostly positive. Monday’s Durable Goods report was a disappointment as it fell below the consensus range, but later that day the Dallas Fed Manufacturing survey came in slightly higher than the consensus average. Tuesday’s consumer confidence came in higher than consensus, 81.5 vs. 78.0. Thursday’s GDP report showed 2^nd quarter GDP growth revised higher from 1.7% to 2.5%; and was followed by another week of modest jobless claims suggesting continued incremental improvement. Friday’s Chicago PMI met consensus at 53.0, and consumer sentiment exceeded consensus 82.1 vs. 80.0.

Last week the blog wrote: “on Friday the Ishares 20+ Year Treasury ETF (TLT) gained 1.1% in volume 88% above average - its highest volume trading day in 9 weeks. If this turns out to be more than a one day wonder its possible interest rate sensitive groups, which have been pounded hard, could begin to recover.” The Ishares 20+ Year Treasury ETF (TLT) gained 1.6% for the week and broke above the descending trend line shown last week.

A broader view of industry group performance shows a continued absence of defensive rotation, with technology related groups performing best over the trailing 5 weeks. Commodity related groups have perked up slightly helped along by the energy group’s response to increasing oil prices. 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)	11	9	11	8	3	3
# in the bottom 50 groups (out of 197)	8	4	3	5	8	12

28 Technology Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	9	8	11	11	13	10
# in the bottom 50 groups (out of 197)	7	5	5	2	4	5

30 Defensively Oriented Groups:	1 wk	2 wk	3 wk	5 wk	13 wk	26 wk
# in the top 50 groups (out of 197)	6	8	5	4	6	7
# in the bottom 50 groups (out of 197)	4	10	16	13	8	6

For several weeks now the blog’s view has been that the market is consolidating/rotating. Market action next week will likely dictate whether this view is correct or if the market’s behavior portends something more serious.

Industry Group Performance:

Autos: Auto related groups look solid with all 5 of the groups ranked in the top 50 of the trailing 5 week price performance list. The two “laggard” groups, Auto/Truck-Tires & Misc and Trucks & Parts-Hvy Duty have seen significant improvement in their MarketSmith industry group rank over the trailing 5 weeks as well:

		MarketSmith Industry Group
Industry Group	Symbol	Rank	5 Wk Rank ∆
Auto Manufacturers	G3711	3	3
Auto/Truck-Replace Parts	G3715	7	17
Auto/Truck-Original Eqp	G3714	26	-7
Auto/Truck-Tires & Misc	G3011	67	58
Trucks & Parts-Hvy Duty	G1010	112	65

Banks: The June 23 blog post highlighted the improving performance in US regional banks, and the positive response to their earnings announcements. That burst of progress may have run its course as last week these same groups pulled back hard. Banks-Northeast fell -2.8% (#136), Banks-Southeast -3.5% (#171), Banks-Midwest -3.6% (#174) and Banks-West/Southwest -4.1% (#184).

Electronics: Last week’s blog post noted the continuing improvement of electronics related groups, and that continued this past week as the Electronic-Parts group (G3680) and Elec-Scientific/Msrng group (G3611) both finished in the top 50 of the trailing 1 week price performance list. 3 of the 4 groups rank in the top 50 of the trailing 3 week price performance list.

Energy: Energy related groups had a strong week with 7 groups ranking in the top 50 of the trailing 1 week price performance list. However, this performance drops off quickly when looking at longer time periods with only 2 groups ranked in the top 50 of the trailing 5 week price performance list.  Groups from the sector have given several convincing head fakes this year with only limited follow through, so further progress would need to be observed before getting too excited. The Energy-Solar group (G1320) has been hammered, down 19.5% over the past 5 weeks.

Mortgage: The Finance-Mrtg&Rel Svc group (G6151) was highlighted 3 weeks ago in the August 11 blog post and continues to perform well ranking #17 on the trailing 3 week price performance list with a 0.1% loss. Both Ocwen Financial (OCN) and Nationstar (NSM) are holding up very well.

Mortgage Reits: The Finance-Mortgage Reit group (G6731) has been hit hard by the increase in interest rates, with the group falling as much as 29% off its March 15 high. As seen above interest rates may be stabilizing, and the group ranks # 26 on the trailing 2 week price performance list with a 0.4% gain. It’s possible the group has seen its short term lows.

Food: Food related groups were hammered last week, most likely in response to concerns over US crop production. Monday’s U.S. Department of Agriculture's weeklycrop-progress report showed that the health of U.S. corn and soybean crops is deteriorating. Soybean prices jumped 4.6%, followed by corn.

The table below shows food related group’s price performance over the trailing 3 weeks, with most of the damage occurring last week:

		Price Performance
Industry Group	Symb.	3 Week Gain	3 Week Rank
Food-Misc Preparation	G2092	-3.7%	113
Beverages-Non-Alcoholic	G2086	-4.1%	130
Food-Packaged	G2091	-5.0%	159
Food-Confectionery	G2070	-7.0%	184
Food-Grain & Related	G2041	-7.1%	186
Food-Meat Products	G2010	-7.7%	190
Food-Dairy Products	G2020	-8.5%	192

Leisure: Leisure related industry groups have performed well, with 4 groups ranked in the top 50 of MarketSmith’s industry group rankings, with those same 4 groups also in the top 50 of the trailing 5 week price performance list. More detail is seen in the table below.

		Price Performance		MarketSmith Industry Group
Industry Group	Symb.	5 Week Gain	5 Week Rank	Rank	Rank ∆
Leisure-Gaming/Equip	G7901	6.1%	6	8	27
Leisure-Movies & Related	G7810	3.3%	13	42	13
Leisure-Travel Booking	G7903	3.2%	14	18	28
Leisure-Products	G3949	1.9%	23	36	35
Leisure-Lodging	G7011	-3.2%	113	173	9
Leisure-Services	G7900	-4.3%	134	99	-13

Generic Drugs: The Medical-Generic Drugs group (G8064) is looking healthy; the group ranks #19 on the trailing 13 week price performance list with an 11.2% gain, and has jumped +47 in MarketSmith’s industry group ranks over the same period of time to #48. The group’s relative strength line is hitting a new high.

Actavis (ACT) has been highlighted here several times over the past several months and still looks attractive.