Stocks have been on a one-way train all month long. Now, as we
approach Groundhog Day, the market appears to be having its own version
of it as the Dow faces 14,000 and the S&P 500 struggles at 1500. As
investors peer out above these levels, will they collectively see their
shadow and retreat to safety for the next six weeks? Or will they
bravely march forward into the clear blue skies to challenge the
all-time highs from 2007?
The market may have foreshadowed its near-term intentions on Tuesday
when, despite rising overall on the day, it was led by defensive
sectors like Healthcare, Consumer Goods, and Utilities.
Seemingly overlooked during this period of falling bonds and rising
stocks is the strength in crude oil. Light sweet crude is nearing the
$100 mark for the first time since last May. Unless there is some direct
threat to global supplies, this is usually a sign of rising demand and
the expectation of a stronger global economy. In fact, supply forecasts
are improving with increased domestic production, which should be
keeping a lid on price increases. Nevertheless, oil stocks have been
strong—particularly the refining & marketing firms, as demonstrated
by Tuesday's earnings report from Valero (VLO). Sabrient favorites
Marathon Petroleum (MPC), HollyFrontier (HFC), and Tesoro (TSO) are also
on a roll.
Although Wednesday morning brought news that the fourth quarter GDP actually contracted
by 0.1% (rather than rise by 1.0% as most expected), a huge 22% decline
in government Defense Spending was a primary culprit, while the
important Personal Consumption component rose a healthy 2.2%. Also, the
FOMC policy statement suggested little change in economic conditions and
no change in the Fed's policies.
The S&P 500 SPDR Trust (SPY) closed Wednesday at 150.07 as it
struggles to break away from this 150 level. Last-minute buying kept it
above 150, but just barely. The wide Bollinger Bands are starting to
pinch back together. The 50-day simple moving average has crossed up
bullishly through the 100-day SMA. However, oscillators RSI, MACD, and
Slow Stochastic are still extremely overbought as bulls have refused to
give up much ground…yet.
I have drawn a new uptrend line of support starting from the bottom
of the New Year's gap, which could get at least partially filled if the
market decides it needs to make a serious test of support, but I doubt
it will fall that far. After the uptrend line, next support levels is
prior resistance-turned-support at 148, followed by the bottom of the
prior zone of resistance at 146, then the New Year's gap from 142, and
finally the 200-day SMA around 140.
Notably, over the same 6-month period, the Russell 2000 Small Cap
Index and S&P 400 Mid Cap Index have about doubled the strong
performance of the S&P 500, and indeed they both pulled back much
more significantly on Wednesday, which might be foreshadowing a larger
pullback in the overall market.
The CBOE Market Volatility Index (VIX), a.k.a. "fear gauge," closed
Wednesday at 14.32, and it has been rising as expected from the extreme
lows it has seen lately. It is possible for the VIX to work off its
extremely overbought technical condition without stocks giving up too
much ground. We shall see.
By the way, in case you're wondering, I'm still holding the last of
my SPY Feb 144 call options to see if the S&P 500 can break through
the 150 level with some gusto before expiration.
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. The multi-factor model considers forward
valuation, historical earnings trends, earnings growth prospects, the
dynamics of Wall Street analysts' consensus estimates, accounting
practices and earnings quality, and various return ratios. 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.
Observations:
1. Technology (IYW) returns to the top spot with a score of 77, while
Healthcare (IYH) falls to third place behind a resurgent Financial
(IYF), which displays an Outlook score of 68. Although it has lost some
Wall Street analyst support, IYW shows strong projected growth and the
best forward valuation, as well as solid return ratios. After its big
25-point jump last week, IYF has maintained its support from Wall
Street.
2. Telecom (IYZ) stays in the cellar with a worsening Outlook score
of 2, as Wall Street has continued to slash estimates. It is now joined
in the bottom two this week by Basic Materials (IYM) with a 28. In
fact, IYM fell by 30 points this week, primarily due to analysts
slashing estimates.
3. Overall, this week's rankings are now notably more bullish,
particularly given the rise in economically-sensitive sectors Industrial
(IYJ) and Consumer Services (IYC) and the fall in defensive sectors
Consumer Goods (IYK) and Healthcare (IYH). In fact, IYC rose by 30
points this week.
4. Looking at the Bull scores, Energy (IYE) is the leader on strong
market days, scoring 58, while Consumer Goods (IYK) is the laggard on
strong market days, scoring 46. This is only a 12-point range from top
to bottom, which indicates high correlation on particularly strong
market days. In other words, Energy stocks have tended to perform the
best when the market is rallying, while Consumer Goods stocks have
lagged.
5. Looking at the Bear scores, Basic Materials (IYM), which used to
be among the worst on weak days, is scoring the highest at 50. Energy
(IYE) is the worst during market weakness, as reflected in its low Bear
score of 38. But there's still only a 12-point range from top to bottom,
which indicates high correlation on particularly weak market days.
Thus, Energy stocks have been selling off the most when the market is
pulling back, while Materials stocks have held up the best, relatively
speaking.
6. Overall, Technology (IYW) shows the best all-weather combination
of Outlook/Bull/Bear scores. Adding up the three scores gives a total
of 174. Telecom (IYZ) is by far the worst at 97. Looking at just the
Bull/Bear combination, Consumer Goods (IYK) is the lowest at 90, while
Basic Materials (IYM) has the best score at 104, which indicates that
Materials stocks have tended to perform relatively well lately in all
market conditions.
These scores represent the view that the Technology and Financial
sectors may be relatively undervalued overall, while Telecom and Basic
Materials sectors may be relatively overvalued based on our 1-3 month
forward look.
Top-ranked stocks within IYW and IYF include CommVault Systems (CVLT), Tech Data (TECD), PartnerRe (PRE), and BlackRock (BLK).
By the way, Sabrient subsidiary Gradient Analytics, a forensic
accounting research firm that publishes in-depth reports on selected
stocks from the standpoint of earnings quality and anomalous executive
behavior (e.g., equity incentives and insider selling), had a couple of
its negatively rated stocks fall this week after poor earnings reports,
including Jos A Bank (JOSB) and Haemonetics (HAE). Notably, JOSB tried
to go under the radar by releasing their bad news at 8:05 p.m. EST on
Friday night.
Disclosure:Author has no positions in stocks or ETFs mentioned.