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Sector Detector: Investors stay focused on their Silver Linings Playbook
by Sabrient - May 16th, 2013 2:08 am
Courtesy of Sabrient Systems and Gradient Analytics
It seems that every Tuesday in 2013 since January 8 has been positive on the Dow. And this past Tuesday was no exception. Now that sounds like a trend to put money on — buy the SPDR Dow Jones Industrial Average ETF (DIA) at the close each Monday and close out the position late on Tuesday.
The Dow and S&P 500 both hit new all-time highs once again on Wednesday, while the Nasdaq hit its highest level since November 2000. The “risk on” allocation of new investment capital into cyclicals continues, although Wednesday saw leadership from defensive sectors Consumer Staples, Utilities, and Telecom, along with Financials. Nevertheless, ConvergEx reports that the average correlation of the ten S&P business sectors to the overall index averaged 82% last month. While that is below the 86% average of the past few years, it is still quite a bit higher than what we expect of a “healthy” market.
Investors have been climbing a “wall of worry” by focusing on their Silver Linings Playbook. And there’s little doubt that the silver linings are growing more prominent. The US economy is improving while unemployment is falling. Bank balance sheets are solid while corporations enjoy historically high levels of cash, and they are deploying their cash for stock buybacks and acquisitions. Most retail investors are still on the sidelines with cash at the ready, and they are starting to show an appetite for equities. Housing is displaying sound footing as demand and prices both rise. Increasing asset values of homes and stock portfolios are creating a wealth effect that is spurring consumer spending.
Furthermore, corporate earnings have been growing, but there has not been much top-line growth as businesses have been reluctant to expand, choosing instead to rely upon cost-cutting and increased productivity. However, confidence in the global economy and increased consumer spending should eventually get them to start hiring again.
Another positive for the long-term health of the global economy is the boom in North American oil and gas production (primarily related to shale and oil sands, as well as to the impact of new technologies on extraction from mature fields). As the US gradually moves toward the Holy Grail of energy independence, it would remove a major obstacle to growth that the “peak oil” doomsayers have been predicting. North America’s emerging competitive…
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ETF Periscope: Bulls Roar Could Turn Hoarse in the Coming Weeks
by Sabrient - May 14th, 2013 11:52 am
Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“If you simply try to tell the truth you will, nine times out of ten, be original without ever having noticed it.” — C.S. Lewis
Another week, another victory lap for the Bulls.
Anyone notice a pattern here? Technically speaking, at least, that pattern is a solid uptrend, with nary an imminent level of resistance close to the horizon.
The market continued its ascent into record-high territory, with all three of the major indices notching yet another set of weekly gains. Specifically, last week’s action saw the Dow Jones Industrial Average (DJIA) gaining 1%, the S&P 500 Index (SPX) rising 1.2%, and the Nasdaq Composite Index (COMP) notching a 1.7% rise.
So is anything standing in the way of the Dow adding another 6% or so and sending it up to the 16,000 mark in the near future? Or for that matter, is anything keeping the SPX from hitting 1,700 within the next several months?
Well, yes.
Aside from the myriad of macroeconomic issues that have recently simmered but not burned, such as China, Syria, and the Eurozone, the barrier to such a relatively unencumbered ascent just might be found directly on Main Street, as seen in the form of the upcoming retail and sentiment numbers that will be released over the course of the coming week.
First up will be Monday’s retail data, courtesy of the U.S. Commerce Department. Then on Friday, Thomson Reuters/University of Michigan consumer sentiment survey will offer a view of the economy from the public’s eye. Sandwiched in between and doled out throughout the week will be a series of earnings reports from the retail sector, including Walmart (WMT) and Macy’s (M).
For much of the last three weeks, the Q1 corporate earnings numbers over this time period have been similar to the overall earnings season, just good enough to support the uptrend that has been in effect so far this year. The same generally may be said regarding the economic data reported over this same period, such as from the housing sector and the jobs numbers. Taken together with the fact that Wall Street has quickly shaken off the shock of the atrocity in Boston on April 15, investors seem to have found no compelling reason to pull money from out of equities in a major way.
So will this week’s retail…
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What the Market Wants: A Puzzling and Irrational Market
by Sabrient - May 13th, 2013 6:37 pm
Courtesy of David Brown, Sabrient Systems and Gradient Analytics
The weekend’s worries that the Fed may be planning the end or slowdown of QE3 translated into a lackluster market performance with little movement in any of the major indices.
There was evidence of flight-to-safety as Healthcare, led by strength within Biotech’s, gained 1.7%. The only other positive sectors were Utilities and Non-Cyclicals. Today’s positive Retail Sales economic reading, up 0.1% contrasted to last month’s -0.5% and an expected -0.3%, had little effect on the market. Whether or not this small setback will halt the robust gain by the S&P 500 of nearly 6% over the past month with more than 8% by the NASDAQ probably depends more on the plethora of economic releases ahead this week. Price data across the board will give us the current picture on inflation, if any, tomorrow. On Wednesday, we will get a much more important looks at Industrial Production, Empire Manufacturing and Capacity Utilization. Thursday will tell us if last week’s improvement in Initial Jobless Claims holds up, along with CPI and in-depth housing data. That will be followed on Friday with Leading Indicators and the Michigan Consumer Sentiment. If the majority of these releases are positive and if common sense tells us that, of course, the Fed would be making its plans to phase out of the stimulus programs someday and somehow, then the last month’s equity rally will likely continue as money flows from money markets and fixed income into equities.
Last week was very different than today. Other than Friday, when the Fed rumors began to percolate, the market made solid daily gains led by growth stocks and especially small- and mid-cap growth stocks. Small-cap Growth led the way up 2.4%, while even the lagging Large-cap Growth gained 1.34% in last place. Growth sectors Consumer Cyclicals, Industrials and Technology were all up 1.75% or better on a weighted basis with Utilities falling 1.78% as the only losing sector.
Our forward-looking Sabrient SectorCast is still a bit cautious, led by Financials, Cyclicals and Healthcare. Technology remains suspect at the bottom of that 30-day future look, but Utilities are just a tad better. It is very likely it is the predicted PC “fall from grace” that is triggering that outlook. We recommend continued positions in growth at a reasonable price.
3 Stock Ideas for this…
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Sector Detector: Bulls start their move into cyclicals
by Sabrient - May 9th, 2013 12:27 am
Courtesy of Sabrient Systems and Gradient Analytics
The S&P 500 is up 14.5% year-to-date through Wednesday, and the defensive sectors like healthcare, consumer staples, and utilities have done even better. But so far in May, the leaders have been industrials, consumer discretionary, energy, materials, financial, and technology. I said last week that new highs were on the horizon, but that a rotation into economically-sensitive sectors, and from value into growth, would be needed to provide fuel for the next leg up. Such a rotation appears to have begun, and the major averages have indeed broken out to new highs.
To be sure, many market commentators have been screaming that a major correction is imminent. And the higher the bulls take it, the worse it will fall, they say. Also, consider that over the past 23 years, the Dow has reverted back to its January opening value at least once during each of those years, and 20 of those years saw a decline greater than 5%.
But this time might be different. I know, I know, those are famous last words. But stocks have consistently demonstrated the ability to simply churn in place to work off overbought conditions. Furthermore, consider that the market has been driven so far this year by a collaboration of reluctant bulls unhappy with the alternatives to stocks, bond refugees seeking higher income, a generally positive trajectory in the economic reports, and corporate stock buyback programs driven by the Fed’s cheap money. So, this might be just the start of a real “risk on” allocation of new investment capital into cyclicals.
If so, that’s a healthy sign of investor confidence in the US economy and in the stock market as a place to invest for the longer term. Even better, investors appear to be a broadening into cyclical sectors rather than rotating. The defensive sectors are holding up even with their lofty valuations, while the cyclicals are rising. Because defensive stocks generally offer a reasonable yield, we won’t necessarily see money flee those sectors. It all looks bullish for stocks.
Looking at the chart of the SPY, it closed Wednesday at 163.34. After a couple of tries during April at breaking through psychological resistance at 160, SPY indeed broke out with gusto. The catalyst was encouraging reports on jobs and unemployment. Oscillators like RSI, MACD, and Slow Stochastic all made…
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What the Market Wants: Risk Remains On
by Sabrient - May 6th, 2013 6:42 pm
Courtesy of David Brown, Sabrient Systems and Gradient Analytics
The market enthusiasm generated by the positive employment report on Friday carried over to today. The rally in Technology stocks continued from last week, but Financials did even better. With the Nikkei and FTSE both closed, the off-shore action ended slightly more positive than negative. We had no domestic reports today in what will be a quiet week of economic news with only Thursday’s Initial Jobless Claims and Wholesale Inventories Reports, following tomorrow’s Consumer Credit report.
Last week’s generally positive news should carry in this week, barring any major shake-ups from global hot spots. Positive Personal Spending and robust increases in Case-Schiller HPI and Consumer Confidence paved the way for the strong employment reports last week. Only Chicago PMI, Personal Income, and Construction Spending kept the week from a break-out rally. But one can’t complain about the 2% rise in the S&P 500, which reached new all-time highs today along with a 3% gain in the NASDAQ, as techs carried the week.
In addition to Financial and Technology stocks, Energy did well today as oil and gas bounced to positive closes after weak openings. So, without a negative surprise, it is likely that equities will continue to rise as funds flow from the dangerously risky bond market (note Buffet’s comments today on bond risk). Our study of valuations continues, but it appears that while clearly above average, valuations are well off former highs. Hopefully, we will have more specifics on valuation by next week.
What do the equity markets favor? Well, last week all style/caps did well, but the best was Large-cap Growth, up 2.5%, and the worst was Large-cap Value, up 1.4%. In general, growth fared a bit better than other styles, except for small-caps. With Utilities and Heathcare bringing up the bottom of the sector performances, it’s clearly been a risk-on market, particularly in the Technology and Financial sectors.
4 Stock Ideas for this Market
I select the following stocks with GARP in mind:
AGCO Corporation (AGCO) – Industrials
- Trading for 10.32x current earnings and 9.25x forward
- Recent upward analyst revisions to EPS estimates
- Projected EPS growth: -13% current quarter, 25% next quarter
Macy’s Inc. (M) – Consumer Cyclical Goods
- Trading for 14.2x current earnings and 10.4x forward earnings
- Projected EPS growth:
…
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ETF Periscope: VIX May Be Low, But High Volatility Continues to Lurk
by Sabrient - May 6th, 2013 2:12 pm
Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“So be sure when you step. Step with care and great tact. And remember that Life’s a great balancing act.” -- Dr. Seuss
The market has gone back to its Bullish ways, resuming the upward trajectory that has been effectively going on for most of the year, as represented by the 13% gain to date of the S&P 500 Index (SPX).
An anticipated correction looked like it might go into effect mid-April, with the Boston Marathon bombings serving as the catalyst. Yet the Bulls righted their ship with surprising haste, while the Bears have found themselves mainly back on their posteriors since that brutal event unfolded.
The market’s upbeat sentiment was revealed last week in the major indices bottom lines, as the Dow Jones Industrial Average (DJIA) ended up gaining 1.8% on the week, while the SPX added 2.0%. Meanwhile, the tech-laden Nasdaq Composite Index (COMP) continued on its recent tear, once again outperforming both the SPX and the Dow. The COMP ended up with a gain of 3% over the same time period.
As reflected in last week’s market performance, investors seem to be sticking to the majority POV that, generally speaking, the fair-to-middling Q1 corporate earnings numbers that have emerged over the last several weeks have managed to trump the ongoing mediocre domestic economy data, such as last week’s combination of decent jobs numbers being somewhat muted by poor factory orders data.
The current upbeat perspective has, no doubt, been heartily maintained as a response to the ongoing promise from the Fed that its overworked printing press will not downshift any time real soon.
At this point in time, close to 80% of the S&P 500 companies have already reporting earnings. So even if the remaining batch of earnings reports proves to be slightly more negative than expected, they still might not impact the market in a meaningful way. Unless, of course, a sudden, collective burst of missed earnings numbers emerge, which in turn could become amplified by a string of negative projections from those same offending corporations.
One number that shouldn’t be much of a surprise, however, at least relative to the upward equity trend, is that of the Chicago Board Options Exchange Market Volatility Index (VIX), which was hovering under the 13 mark as of the end of last week. While the VIX, commonly referred…
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Sector Detector: Knock, knock, knocking on new highs … but running on fumes
by Sabrient - May 2nd, 2013 1:10 am
Courtesy of Sabrient Systems and Gradient Analytics
Stocks finished the month of April breaking to new highs, with the S&P 500 rising above 1597. But May Day selling put a temporary hold on the bullish celebration that will certainly occur if the S&P 500 can make a clean break above psychological resistance at 1600. Was May Day the start of the usual “Sell in May and go away” practice? Time will tell, and there’s little doubt that stocks appear to be running low on fuel at this point.
But my bet is that new highs are coming sooner than later. Stocks have shown an impressive propensity to simply churn in place when many observers expect a major correction.
On Wednesday, the Federal Reserve announced that it would maintain its bond purchase program at $85 billion per month and keep its interest rate target at zero to 0.25%. Weak economic reports like the ADP payroll report and manufacturing suggested that the economy is still struggling. Next up is the European Central Bank policy announcement, in which it is expected to lower its main interest rate by 25 bps to 0.5%.
Although corporate earnings generally have been beating estimates, revenue growth has lagged. Some analysts are worried that companies’ ability to continue propping up earnings through cost-cutting and productivity gains will become more difficult going forward.
Apple (AAPL) caused quite a stir this week when it rolled out the largest non-bank bond deal in history, $17 billion. The firm intends to use the funds to return as much as $100 billion in cash to its shareholders. Before this, AAPL was the only major technology company without any debt on its books.
This year’s rally continues to be led by defensive sectors healthcare, utilities, and consumer staples. Looking at the iShares US sector ETFs, Healthcare (IYH) and Utilities (IDU) are both up 18.4% year-to-date through May 1, and Consumer Goods (IYK) is up 16.5%. Compare this to the SPDR S&P500 Trust (SPY), up 11.6%, and the Guggenheim S&P 500 Equal Weight (RSP), up 13.0% YTD.
Moreover, let’s compare some low-volatility ETFs. Guggenheim Defensive Equity (DEF), which tracks the Sabrient Defensive Equity (DEF), is up 15.9% and the PowerShares S&P500 Low Volatility (SPLV) is up 16.4%. These defensive plays are generally expected to lag when the market is strong like it has been. But instead they…
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Sector Detector: Knock, knock, knocking on new highs…but running on fumes
by Sabrient - May 2nd, 2013 1:10 am
Courtesy of Sabrient Systems and Gradient Analytics
Stocks finished the month of April breaking to new highs, with the S&P 500 rising above 1597. But May Day selling put a temporary hold on the bullish celebration that will certainly occur if the S&P 500 can make a clean break above psychological resistance at 1600. Was May Day the start of the usual “Sell in May and go away” practice? Time will tell, and there’s little doubt that stocks appear to be running low on fuel at this point.
But my bet is that new highs are coming sooner than later. Stocks have shown an impressive propensity to simply churn in place when many observers expect a major correction.
On Wednesday, the Federal Reserve announced that it would maintain its bond purchase program at $85 billion per month and keep its interest rate target at zero to 0.25%. Weak economic reports like the ADP payroll report and manufacturing suggested that the economy is still struggling. Next up is the European Central Bank policy announcement, in which it is expected to lower its main interest rate by 25 bps to 0.5%.
Although corporate earnings generally have been beating estimates, revenue growth has lagged. Some analysts are worried that companies’ ability to continue propping up earnings through cost-cutting and productivity gains will become more difficult going forward.
Apple (AAPL) caused quite a stir this week when it rolled out the largest non-bank bond deal in history, $17 billion. The firm intends to use the funds to return as much as $100 billion in cash to its shareholders. Before this, AAPL was the only major technology company without any debt on its books.
This year’s rally continues to be led by defensive sectors healthcare, utilities, and consumer staples. Looking at the iShares US sector ETFs, Healthcare (IYH) and Utilities (IDU) are both up 18.4% year-to-date through May 1, and Consumer Goods (IYK) is up 16.5%. Compare this to the SPDR S&P500 Trust (SPY), up 11.6%, and the Guggenheim S&P 500 Equal Weight (RSP), up 13.0% YTD. Equity Index, is up 15.9% and the PowerShares S&P 500 Low Volatility (SPLV) is up 16.4%. These defensive plays are generally expected to lag when the market is strong like it has been.
Moreover, let’s compare some low-volatility ETFs. Guggenheim Defensive Equity (DEF), which tracks the Sabrient Defensive Equity…
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What the Market Wants: Risk-on
by Sabrient - April 29th, 2013 5:51 pm
Courtesy of David Brown, Sabrient Systems and Gradient Analytics
It was a pleasant opening today for the market with positive results and market activity from Europe, as well as generally positive domestic economic reports this morning. In particular, pending home sales were up 1.5% versus an expected 0.1% and last month’s -1.0%. Personal spending was a little better-than-expected while personal income was but a tad less-than-expected and lower than last month. The week will be fairly full as companies continue to report Q1 earnings, and it is a busy week for economic reports as well. These include Chicago PMI, Case Schiller, and Consumer Confidence tomorrow; Construction Spending Wednesday; Initial Jobless Claims and Trade Balance Thursday; and the full monthly report of employment on Friday. Most are expected to be near expectations.
Last week, as you will note in the market stats below, Small-cap Growth led the week’s strong market, up 2.8%, while Large-cap Value trailed but was still up 1.75%. The SPY flirted with its all-time high of 159.7, which it set on April 11, and is flirting with it again today. Energy (+3.47%), Technology (2.78%), and Consumer Cyclicals (2.68%) led last week’s sector performance while Utilities, Healthcare, and Non-Cyclicals trailed with only Non-Cyclicals in the red.
This week appears to be shaping into a classic “flight-to-risk” market — indeed, the diametric opposite of the previous week. Most corporate reports beat on earnings, doing even better than the last several quarters, while most missed on revenues, in even worse fashion than recent quarters. For now, the market appears be “risk on,” although a bit flighty with rapid reversals in behavior.
Sign of a top? Not sure. We will do our quarterly analysis of valuations this week and report to you next week. Our sense is that valuations are well off the early 2009 bottom, but they are not near extremes. We believe, but must confirm, that forward values are just average or a tad over average across the board.
We would continue to seek growth stocks that are priced reasonably and perhaps favor mid-caps to ease our cautionary concerns. This week should be fairly important with the numerous important economic releases.
3 Stock Ideas for this Market
This week we did a GARP preset search in MyStockFinder:
Genworth Financial Corp (GNW) – Financials
Trading for 15x current earnings and 7x…
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ETF Periscope: Is the Eurozone About to Shake Up Wall Street Again?
by Sabrient - April 29th, 2013 12:27 pm
Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time.” — Johann Wolfgang von Goethe
The Eurozone has been sinking into a steady and extended recession, and if there is some reason for that trend to reverse itself in the near future, it isn’t an obvious one at the moment.
But is that something Wall Street needs to be paying close attention to in the short term? Only if it doesn’t want to be caught off-guard, as it seemed to be with the recent Cyprus banking debacle
There are simply too many crosscurrent events occurring at the moment to ignore from the Eurozone, the kind of things that can suddenly coalesce into something akin to an economic rogue wave.
Granted, Wall Street had a much better go of it last week than the preceding one, when Cyprus appeared to be dangerously close to imploding. All three of the major indices ended the last five-session cycles in the black, though not quite enough to recoup the losses that resulted from the recent Cyprus “event.”
The Dow Jones Industrial Average (DJIA) ended the week in the black by 1.1%, but still off a full 1% from the previous week’s fade. The benchmark S&P 500 Index (SPX) rose 1.7%% last week, while the tech-laden Nasdaq Composite Index (COMP) outperformed both the SPX and the Dow, adding 2.3% to its bottom line over the course of the same period.
The U.S. equity market would seem to be inexorably marching towards an extended testing of new highs, as the current corporate earnings season has conformed closely enough to expectations so as not to upset the bullish uptrend that has been in place for the majority of 2013.
The same can be said for the domestic economic data, with even lower-than-expected GDP numbers failing to fluster the market in any serious way.
It’s as if the fundamentals of the actual economy, with stubbornly high job numbers and minimal growth, are not quite enough to dissuade the Bulls, nor unshackle the Bears. It’s as if Wall Street was a different beast than Main Street, a somewhat related but distant cousin, as it were.
But the Eurozone may be brewing a mix that could impact investor sentiment in short…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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