Sector/Group Rotation Notes - 2/2/14

It was a volatile week in the markets with the Nasdaq falling -1.9% Monday through Wednesday before ripping higher on Thursday + 1.8%. Friday the Nasdaq gapped down -1.4% before working higher to turn positive ~ 2:30 PM but then pull back to end the day -0.5%. The Nasdaq finished the week -0.6%, but if you factor out AAPL's -8.3% weekly loss the index would have actually gained ~ 0.2%.

Economic data for the week was mixed. New home sales data released Monday missed consensus, 414K vs. 450K.  Durable goods orders released Tuesday missed badly, -4.35% vs. 1.6% consensus, the only bright spot being that this tends to be a volatile month-to-month indicator. Thursday's release of Q4 GDP showed a 3.2% increase vs. 3% consensus, while the pending home sales index showed a M/M decline of -8.7%.  On Friday Chicago PMI edged consensus expectations at 59.6 vs. 59.5, and consumer sentiment was healthy with a reading of 81.2.

Last week 1,368 reported earnings with winners including Under Armour +29.5%, Facebook +14.9%, Chipotle +12.1% and Google +5.1%. Large cap losers included Apple -8.3%, Amazon -7.5%, Boeing -8.3%, Celgene -5.8%, Altria -5.6%, and Ford -5.5%. Next week 606 companies release results including Disney, Gilead, Baidu, Teva, Twitter, Linkedin, Himax, Yelp, and Tableau Software.

Weekly price performance of technology, commodity and defensively oriented groups was uninformative with all three categories providing equivalent numbers of groups in the top and bottom performing quartiles.

Summary: Despite increased volatility losses in the market last week were modest with the average stock declining 0.6%. Despite the decline, many stocks normally viewed as defensive fell, while more aggressive growth oriented stocks actually gained. This can be seen in weekly sector performance where Alcohol/Tobacco stocks fell an average of -2.3%, and Food & Beverage stocks fell -1.3% while the average Software stock gained 0.3% and the average Internet stock picked up 0.9%. Many seem to be expecting a large pullback; the blog does not share this view and expects the market to continue to offer solid opportunity for those investors positioned in the right groups and sectors.

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Industry Group Performance:

Builders: Six weeks ago in the December 22 analysis the blog pointed out the improving situation in housing, noting that the Philadelphia Housing Index had broken higher out of a 3 month ascending triangle. Since that time the Bldg-Resident/Comml industry group has been the sixth best performing industry group logging a 12% gain, most of which occurred just last week as it finished the week #1 with an 11.5% gain.  Over the past week the group jumped +70 in MarketSmith's industry group ranks from #111 to #41.

Most of last week's gain was the result of superior earnings results, with NVR gaining +14.4% for the week, followed by DHI +12.5%, WLH +9.2%, and PHM +7.9%.

Meritage Homes (MTH) was featured in the 12/22 blog post but was held back by a primary offering that occurred January 10. MTH has solid quarterly sales & EPS results, and analysts forecast that to continue estimating FY '14 EPS +28%. MTH is scheduled to report Wednesday 2/5.

Internet: As readers know the blog has been highlighting the improving strength of the Internet-Network Solutions industry group since the January 5 blog post. Since then the group has gained 7.3% in price and has jumped +69 in MarketSmith's industry group rankings from #141 to #72.

Gigamon (GIMO) is getting mentioned here for the 5th consecutive week... On Friday GIMO was upgraded by GS and given a $38 target, the GS analyst also suggested GIMO could be a takeover target. GIMO reports next Tuesday with analysts expecting earnings of $0.12 per share on sales of $41.9 million.

Software: Software related groups continue to exhibit superior relative strength. 5 of 10 software groups finished the week ranked in top 50 of all groups on the trailing 1-week price performance list, and 7 of 10 are ranked in the top 50 on the trailing 3 week list. The sector also enjoys seven groups ranked in the top 50 of MarketSmith's industry group rankings.

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Note: I have decided to take a hiatus from publishing for an undetermined period of time. To put it simply, the amount of time required to format and publish the analysis has become burdensome (at least in the short term), and would be more profitably put to other uses. If you have found this work useful I will continue to share observations on Stock Twits and Twitter, you may want to consider following if you have not already done so (links are at the top of this page on the right).

All data and charts displayed here are the property of MarketSmith, and are published here with their permission. 

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.