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Sector Detector: Bulls Try to Recruit a Leader

Posted on the 23 June 2011 by Phil's Stock World @philstockworld
A return of some bullish sentiment has provided an encouraging bounce this week after finding some leadership from Basic Materials, Industrial, Energy, and Consumer Services, as predicted by last week’s Bull Scores in Sabrient’s SectorCast rankings. It might only be fleeting, though. Today’s partial retracement could be signifying either an end to an oversold bounce or a simple pause to consolidate some hard-fought gains after four consecutive up days.Although the dollar was up only fractionally today, its late-day strength correlated with the late-day demise in stocks. Still, dollar-sensitive Energy and Materials held up the best. Last week I pointed out that big cap Technology names have not been providing the needed leadership that the bulls have come to expect. But this week, there was a glimmer of strength from the sector on Tuesday. Let’s see if there is any follow through on the horizon.Many are blaming Fed Chairman Bernanke’s reduced optimism on the U.S. economy as the reason for the late selloff. Nevertheless, the global economy is strong, with some countries like China actually trying to rein in growth, and most of the companies in the S&P 500 earn much of their profits overseas in the stronger local currencies. So, aggregate earnings among the S&P 500 firms are now at a record high – with no reduction expected.Last Tuesday was very promising, as stocks had their strongest day in almost two months. But then Wednesday gave it all back, plus some. However, all was not lost as the market slowly crawled back with four successive positive days, culminating in yesterday’s (Tuesday) very bullish showing. Today’s (Wednesday) retracement was not nearly as scary as last Wednesday’s false reversal, and I see several signs of bullish divergences that are quite encouraging.Since the beginning of the month, the Dow has lost and recaptured the 12,000 level, and the Russell 2000 has lost and recaptured the 800 level (although it was clinging for dear life at the close today). However, the S&P 500 lost but has not quite recaptured 1300, and today’s mid-day bullish action was rebuffed at 1300. The bulls might take another run at it soon, though.Let’s look at the SPY chart. The 200-day moving average providing a nice bounce point, and history shows that after riding along the lower Bollinger Band, price tends to make its way back up to the top band, which it seems to be doing now. MACD and RSI have made an attempt at bullish crossovers. The 130 level for SPY is the first level of resistance, and it held today. Above that, resistance at the 132 level, which corresponds with the 100-day simple moving average, will be the next challenge.The TED spread (i.e., indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed at 23.54, which is up from last week but still within this 20-25 trading range it has been in. The CBOE market volatility index (VIX) closed today at 18.52, which is down for the fourth straight day despite the market being down today. This indicator of fear is still relatively dormant.Latest rankings: The table ranks each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score, which employs a forward-looking, fundamentals-based, quantitative algorithm to create a bottom-up composite profile of the constituent stocks within the ETF. In addition, the table also shows Sabrient’s proprietary Bull Score and Bear Score for each ETF.High Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods. Bull and Bear are backward-looking indicators of recent sentiment trend.As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.Here are some notable observations in Sabrient’s SectorCast Outlook scores this week.1. Technology (IYW) rose 10 points to hold the top spot by a wide margin, scoring a robust 96. Analysts have not been coming out lately with strong upgrades within any particular sector, but Technology has been getting the most support. IYW remains below its 200-day moving average, having closed today at 62.79 while its 200-day is above 64.2. Healthcare (IYH) is back into the top two, scoring a strong 78. The sector has been a steady performer so far this year, up about 12%, which easily outperforms the other sectors. 3. Energy (IYE) dropped 17 points to 46 this week, mainly due to a rash of earnings reductions among analysts. 4. Utilities (IDU), Telecom (IYZ), and Consumer Services (IYC) remain mired at the bottom due to poor support among analysts, high projected P/E, and in the case of IYC, poor return on sales as retail margins remain low.5. The forward-looking Outlook rankings continue to reflect a cautiously bullish bent, although somewhat less so than last week’s, in my opinion. The low score in Consumer Services (IYC) is the biggest negative, and Financial (IYF) needs to find some supporters. But otherwise, the rise in IYW and ongoing strength in Materials (IWM) and Industrial (IYJ) is moderately bullish.Looking at the Bull scores, Basic Materials (IYM) is the strongest on strong market days, followed by Industrial (IYJ) and Consumer Services (IYC). Financial (IYF) continues to be something of a laggard on strong market days, but now Utilities (IDU) is the weakest. As I have been saying, Financial needs to get some footing and become a leader on bullish days if the market is going to get real traction.As for the Bear scores, Utilities (IDU) has been the strongest on weak market days, and is the clear favorite “safe haven” sector. Healthcare (IYH), Consumer Goods (IYK), and Telecom (IYZ) are also holding up relatively well. Basic Materials (IYM), which has the best Bull score, has been the clear laggards on weak market days, reflecting quick abandonment among investors. Overall, Technology (IYW) displays the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives it a total score of 196. Defensive sectors Healthcare (IYH) and Consumer Goods (IYK) now share the best combination of Bull/Bear with a total score of 107, followed closely (and somewhat surprisingly) by Consumer Services (IYC) at 106.Top ranked stocks in Technology and Healthcare include Ebix, Inc. (EBIX), Dell Inc. (DELL), Humana (HUM), and SciClone Pharmaceuticals (SCLN).Low ranked stocks in Utilities and Consumer Services include Cheniere Energy Partners (CQP), Clean Energy Fuels (CLNE), (YOKU), and The Talbots Inc. (TLB).These scores represent the view that the Technology and Healthcare sectors may be relatively undervalued overall, while Utilities and Consumer Services sectors may be relatively overvalued, based on our 1-3 month forward look.Disclosure: Author has no positions in stocks or ETFs mentioned.About SectorCast: Rankings are based on Sabrient’s SectorCast model, which builds a composite profile of each equity ETF based on bottom-up scoring of the constituent stocks. The Outlook Score employs a fundamentals-based multi-factor approach considering forward valuation, earnings growth prospects, Wall Street analysts’ consensus revisions, accounting practices, and various return ratios. It has tested to be highly predictive for identifying the best (most undervalued) and worst (most overvalued) sectors, with a one-month forward look.Bull Score and Bear Score are based on the price behavior of the underlying stocks on particularly strong and weak days during the prior 40 market days. They reflect investor sentiment toward the stocks (on a relative basis) as either aggressive plays or safe havens. So, a high Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods.Thus, ETFs with high Bull scores generally perform better when the market is hot, ETFs with high Bear scores generally perform better when the market is weak, and ETFs with high Outlook scores generally perform well over time in various market conditions.Of course, each ETF has a unique set of constituent stocks, so the sectors represented will score differently depending upon which set of ETFs is used. For Sector Detector, I use ten iShares ETFs representing the major U.S. business sectors.About Trading Strategies: There are various ways to trade these rankings. First, you might run a sector rotation strategy in which you buy long the top 2-4 ETFs from SectorCast-ETF, rebalancing either on a fixed schedule (e.g., monthly or quarterly) or when the rankings change significantly. Another alternative is to enhance a position in the SPDR Trust exchange-traded fund (SPY) depending upon your market bias. If you are bullish on the broad market, you can go long the SPY and enhance it with additional long positions in the top-ranked sector ETFs. Conversely, if you are bearish and short (or buy puts on) the SPY, you could also consider shorting the two lowest-ranked sector ETFs to enhance your short bias.However, if you prefer not to bet on market direction, you could try a market-neutral, long/short trade—that is, go long (or buy call options on) the top-ranked ETFs and short (or buy put options on) the lowest-ranked ETFs. And here’s a more aggressive strategy to consider: You might trade some of the highest and lowest ranked stocks from within those top and bottom-ranked ETFs, such as the ones I identify above. Tweet This Post , SQQQ, TZA, USO, UUP, VZ Caitlin Duffy Equity Options Analyst   Tags: BZH, CPB, EMR, RENN This entry was posted on Wednesday, June 22nd, 2011 at 4:20 pm and is filed under Uncategorized. You can leave a response, or trackback from your own site. Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!

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