Sector & Group Rotation Notes – 9/15/13

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 Semiconductor Index	2.8%	6.7%	5.3%	3.5%	4.9%	12.4%
Pboe Oil Service Index	1.5%	5.7%	3.7%	2.9%	7.2%	8.7%
Philadelphia Housing Index	4.1%	6.4%	4.2%	2.8%	-6.3%	-7.1%
Nasdaq Composite	1.7%	3.7%	1.8%	1.7%	8.7%	14.6%
Russell 1000 Energy Index	1.4%	2.8%	2.7%	1.3%	4.6%	4.3%
Cboe Technology Index	-0.1%	1.7%	-0.5%	1.2%	5.7%	4.1%
Dow Jones Transportation Index	2.4%	4.4%	0.7%	0.7%	3.4%	4.0%
Russell 2000	2.4%	4.3%	1.5%	0.5%	7.4%	10.7%
S&P 500	2.0%	3.4%	1.5%	-0.2%	3.8%	8.2%
DJIA	3.0%	3.8%	2.4%	-0.3%	2.0%	5.9%
Philadelphia Gold/Silver Index	-7.1%	-7.5%	-14.1%	-2.0%	-6.7%	-28.8%
KBW Large Cap Bank Index	0.8%	2.4%	-1.9%	-2.5%	5.9%	10.7%
Philadelphia Utility Index	0.6%	-0.3%	-1.4%	-5.6%	-1.4%	-4.4%

For the week markets were sharply higher, with the Dow gaining 3.0% followed by the Russell 2000 +2.4%, , the S&P 500 +2.0%, and the Nasdaq +1.7%. It's important to note that the Nasdaq's performance was hindered by Apple's 6.7% weekly decline; the Nasdaq gained 2.6% ex-Apple.

The Dow's outperformance was helped along by Disney's 8.6% weekly gain (powered by a stock buyback announcement), as well as 5% gains in Boeing and United Technologies, and a 4.3% pickup by Caterpillar. Combined, these four companies represent 18.6% of the weighting of the DJIA.

Both the August 11th and August 25th blog post discussed the improving Chinese and euro-zone economic data, and it was more of the same that ignited Monday's market higher. On Monday China's exports gained 7.2% YOY up from a 5.1% rise in July and a contraction of 3.1% in June, strongly suggesting the China's economy has bottomed and begun improving. This was followed the next day with data indicating industrial output in China grew 10.4% in August YOY, accelerating from the strong 9.7% increase in July. A MarketSmith screen of companies based in China with price > $10 and 50 day average volume > 250K yields 26 stocks. Last week these 26 stocks posted an average gain of 4.6%; led by NQ +28.2%, AMAP +18.4%, YOKU +11.8%, EDU +9.3%, and VIPS +8%.

In US economic data Thursday's jobless claims data was corrupted by the absence of two states data and was thus useless. Friday's Producer Price Index gained 0.3% vs. 0.2% expected, but the core rate was flat. Retail Sales were weak gaining 0.2% vs. 0.5% consensus, and consumer sentiment fell to the lowest level of the year, perhaps reflecting apprehension over the President's unprecedented incompetence in foreign affairs.

 

Last week's blog wrote "In reaction to the employment news on Friday the Bldg-Resident/Comml group (G1520) was the best performing group for the day with a 2.1% gain, the Finance-Property Reit group (G6730) finished #5 with a 1.3% gain, and the Finance-Mortgage Reit group (G6731) finished #8 with a 1.1% pickup. These groups are still 21%, 16%, and 25% off their recent highs and could stage strong rebounds if investors conclude interest rates have stabilized, or if tapering is more modest than currently expected" For the week 5 building groups finished in the top 50 of the trailing 1 week price performance list, while the two REIT groups finished with 2.1% gains. These groups have the potential to continue to perform well if next Wednesday's FOMC announcement results in a stabilizing of interest rates.

Last week the Philadelphia Gold/Silver Index fell 7.1% and currently rests on an ascending trend line of support drawn from the June 26 low. A strong break of this line would suggest, at a minimum, a retest of that low.

A broader view of industry group performance shows a continued absence of defensive rotation, with technology groups outperforming. 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)	8	8	6	9	6	2
# in the bottom 50 groups (out of 197)	7	8	7	6	7	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)	11	12	14	15	14	8
# in the bottom 50 groups (out of 197)	4	5	3	3	2	3

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	3	6	4	4	6
# in the bottom 50 groups (out of 197)	6	10	11	14	12	6

The month of August was turbulent, leading many to predict a market top or "market in correction". This blog has been consistent in its analysis that the market was consolidating/rotating before a move higher, and it would appear the past week's performance has proven this analysis correct.

August 11: "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."

August 18: "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."

August 25: Last week in summarizing its market outlook the blog wrote "some call this a "market in correction". The Sector Trends blog strongly disagrees with this market view and suggests readers look at this as a "market in rotation"... The view here remains that 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." Nothing has changed in this view, other than the improving data from China and the euro-zone suggests the move higher may come sooner rather than later.

September 1: "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."

September 8: Quoting the August 11th blog post above: "Those same words are as true (and accurate) today as they were four weeks ago. The Nasdaq is now 0.9% off its high, and while Syria and the FOMC announcement will likely create some volatility, the odds favor that the next major move will be a move higher."

Industry Group Performance:

Electronics: The Sector Trends blog first highlighted the emerging strength in electronics related groups three weeks ago and that strength continued this past week as 3 of the 4 groups finished in the top 50 in trailing 1 week price performance. This data is shown in the table below:

	Price Performance			MarketSmith Ind. Group
Industry Group	1 Week Gain	1 Week Rank		Rank	3 Wk Δ
Elec-Contract Mfg	4.6%	11		14	+17
Electronic-Parts	4.4%	16		37	+49
Elec-Scientific/Msrng	3.1%	48		115	+18
Elec-Misc Products	0.1%	178		161	-8

Maxwell (MXWL) continues to show signs of accumulation while the Bollinger Bands have tightened up into a volatility squeeze. A/D rating “B+”, 50 day up/down volume 2.2, 25 day 1.8. Note the strong quarterly EPS and sales increases on the chart below. Note as well the 3 weeks tight in the weekly chart below, and how volume is drying up.

Internet: Last week's analysis highlighted strength in internet related groups and that continued this past week. The Internet-Content group (G3334) gained a modest 1.3% (#145 for the week) but the Internet-Network Solutions group (G3586) gained 4.6% (#12 for the week). Last week's highlighted stocks from the group for the most part performed well:

Symbol	Name	Performance	Industry Name
MOVE	Move Inc	8.8%	Internet-Content
YY	YY Inc Ads	7.2%	Internet-Content
BCOR	Blucora Inc	5.7%	Internet-Content
LOGM	Logmein Inc	3.3%	Internet-Network Sltns
WBMD	Webmd Health Corp	-6.3%	Internet-Content

Logmein (LOGM) broke out of its volatility squeeze on Monday, pulling back inside the upper Bollinger Band Thursday & Friday. Volume for the week was 40% above average and MarketSmith's weekly chart shows the relative strength line hitting a new high. LOGM appears headed higher.

Machinery: Last week's blog pointed out the emerging strength in the Machinery-Gen Industrial group (G3569) and last week other groups from the sector started to chime in as four machinery related groups made the top 50 of the trailing 1 week price performance list.

		Price Performance			MarketSmith
Industry Group	Symb.	1 Week Gain	1 Week Rank		Group Rank
Machinery-Tools & Rel	G3541	3.7%	29		108
Pollution Control	G3566	3.3%	41		135
Electrical-Power/Equipmt	G3621	3.2%	45		94
Machinery-Constr/Mining	G3531	3.1%	47		186
Machinery-Gen Industrial	G3569	2.9%	68		70
Machinery-Mtl Hdlg/Autmn	G3537	-4.5%	196		5

The groups appear to be reacting to the improved economic data out of China.

The #5 ranked group from the sector, Machinery-Mtl Hdlg/Autmn was pummeled. 3-D printer stocks were clobbered after SSYS  proposed and consummated a primary and falling 13.2%. XONE also consummated a primary offer and fell 15.4%, while DDD gave back 2.6%.

Growth: While sector and industry group rotation are important, in the author's opinion at this particular moment investors are looking for growth wherever they can find it. Here are some names that look interesting.

After a 7 week descending channel the Philadelphia semiconductor index is up 6.7% over the past 2 weeks and looks like it might want to make a run at its 2007 high of 550. Ambarella (AMBA) is seeing heavy buying after solidly beating on both EPS and sales last week, and looks ready to move higher out of this double bottom base. A/D "B+", 50 day up/dn volume 1.2, 25 day 1.7. Institutional sponsorship has increased 51 > 68 > 90 over the past 3 quarters.

AVG Technologies was highlighted by the blog back in March and is now setting up again as its RS line hits a new high in advance of price. A/D "B+", 50 day up/dn volume 1.2, 25 day 1.7. Institutional sponsorship has increased 89 > 114 > 139 > 168 last 4 quarters. Note the strong quarterly earnings and sales performance documented in the chart below.

Biogen (BIIB) was highlighted in the August 4th blog post and is back up near the same pivot. Accumulation is strong with a "B+" A/D rating, 50 day up/down volume ratio of 1.4, and institutional sponsorship has increased 1552 > 1608 > 1766 over the past 3 quarters. RS 86, EPS 96, ROE 23%.

S S & C Technologies (SSNC)gained 4.9% last week in volume 43% above average, and has set up a small flag within a larger 6 week flat base. SSNC has a "B-" A/D rating, and both the 50 and 25 day up/down volume ratios are solid at 1.4. Quarterly sales and EPS increases have been spectacular, and institutional sponsorship increased from 269 to 301 funds over the past quarter.Volume for the week was 33% above average.

Valeant Pharmaceuticals (VRX) has a PE of 20 with analysts forecasting FY '13 EPS +36%, and FY '14 EPS +40%. Quarterly sales and EPS results have been explosive, and VRX is seeing some accumulation with a "B" A/D rating and a 50 day up/down volume ratio of 1.5. Institutional sponsorship increased from 985 to 1057 funds over the past  quarter. RS 91, EPS 95, ROE 37%. VRX should present a buying opportunity as the 50 day MA catches up with price, watch for an increase in volume for an early tell.

New Oriental (EDU) is seeing very strong short term accumulation. EDU has a "B+" A/D rating, and although the 50 day up/down volume ratio is an unimpressive 1.0, the 25 day ratio is a potent 1.8. EDU trades at 23x earnings, and analysts forecast FY '14 and FY '15 EPS +26%. RS 84, EPS 96, ROE 21%. EDU is 1% past its pivot out of a double bottom base. As with all Chinese stocks, caveat emptor.

Generac (GNRC) is seeing massive accumulation despite the fact it has been in a descending channel for the past 6 weeks. GNRC has a "A-" A/D rating, 50 day up down volume of 1.5, and a 25 day ratio of 2.1. You read that correctly: as GNRC has been drifting lower over the past 6 weeks, the up/down volume ratio for the last 5 weeks has been 2.1. Institutional sponsorship has exploded 201 > 282 > 317 > 378 over the past 4 quarters suggesting institutions believe that analyst forecasts of an FY '14 EPS decline of 2% are garbage. GNRC looks like a buy with a break higher out of the descending channel seen in the chart below.

Boulder Brands (BDBD) has held up well in the face of headwinds created by weak group and sector performance. BDBD is showing only moderate accumulation at the moment so the name is not posted here in the expectation of immediate price movement, just one for the watchlist. Strengths: RS 90, EPS 93, analyst EPS forecasts +55% and +48%, and the Bollinger Bands are tightening into a volatility squeeze. Weaknesses: Institutional sponsorship has been stagnant, ROE only 4%.