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Courtesy of Scott Martindale, Senior Managing Director, Sabrient
Though the Federal government avoided a debt default with an eleventh hour deal for raising the debt ceiling, investors are apparently unimpressed—especially given the uninspiring economic reports. This week, the Commerce Department reported that personal spending in June fell for the first time in two years. This was coupled with the weak ISM manufacturing report and last Friday’s weak GDP report.
Today (Wednesday), the Dow threatened to close down for the ninth day in a row. Eight days in a row hadn’t happened since October 2008, and nine days in a row hasn’t happened since 1978 (according to CNBC). But buyers arrived in the nick of time to staunch a steep selloff about an hour into the trading day, and stocks closed near their highs for the day. Technology, Telecom, Industrials, and Consumer Discretionary led the recovery, while Energy was distinctly weak. The S&P 500 hit its lowest intraday levels for 2011, but managed to finish the day above its March closing lows.
The “deal” that was finally passed and signed by the President is really no deal at all yet, although the Obama Administration is in the clear until after the 2012 election. A special committee will be appointed to determine appropriate reductions in spending, and no actual spending cuts (or more accurately, reductions in spending increases) will happen until after the 2012 election.
Many market observers, including myself, had expected a relief rally in the wake of a debt deal passage. After a brief spike first thing Monday morning to commemorate the announcement of the deal, the reality of the legislation (and its lack of substance) quickly set in, and the Dow sold off. It bounced strongly at 12,000 intraday on Monday, which also corresponded with the 200-day simple moving average, and all appeared well. But alas, the markets continued to sell off hard on Tuesday. This is despite the strong earnings reports from many companies (particularly the multinationals). In fact, earnings among S&P 500 companies are up nearly 14% over the same quarter last year.
Let’s look at the SPY chart. It held at support at 130 last Friday, and at that time I surmised that the intraday dip may have been a capitulation event among weaker bulls and a good launch point for a relief rally, pending a debt deal over the weekend. But the Monday morning rally was short-lived as the uncertain terms of the deal disappointed. Nevertheless, the SPY closed Monday right at support from the 200-day simple moving average, but then Tuesday blew any semblance of support right out the window, while volume has been steadily increasing throughout this market turbulence.
On the positive side, however, today (Wednesday) ended with a big, strong, classically-bullish hammer candlestick formation, and SPY closed near its highs for the day at 126.17, after dipping as low as 123.53 intraday. And RSI and MACD appear to be turning up from oversold conditions. We’ll be watching for confirmation of a reversal tomorrow—at least for an oversold bounce to test resistance back up at the 200-day moving average near 129.
The next important U.S. economic report will be Friday’s Employment Situation Report. BNY ConvergEx has observed that the negative trend in the U.S. Treasury’s individual tax receipts is flashing a warning sign about future job growth. They also noted that 15% of all Americans are now enrolled in the Food Stamp program.
On the other hand, the euro and U.S. dollar are suffering at the hand of most Asian currencies, as well as others like the Swiss franc, Australian dollar, Canadian dollar, and Brazilian real. This has led some central banks to intervene in a futile attempt to prevent their currencies from rising too rapidly. This relative weakness in the U.S. dollar should continue to provide support to U.S. stocks.
We saw a huge 24% spike today in 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). It closed at 25.81, which is up from 17.66 last week at this time. Last week, it appeared that investors were fleeing stocks in favor of corporate bonds, but today we got just the opposite. On the other hand, the CBOE market volatility index (VIX) closed down 6% at 23.38. It spiked above 25 intraday, but never reached as high as it got on Friday and Monday, despite the increased volume and apparent panic-selling.
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 virtual portfolio for a given set of anticipated market conditions.
A few changes in the rankings this week. Here are some observations about Sabrient’s latest SectorCast scores.
1. Financial (IYF) didn’t move much this week after last week’s 15-point boost in its Outlook score. But it still rose into the top spot, as analysts continue to come out with earnings upgrades. It is also among the top in return on sales, and its projected price/earnings ratio is the lowest (best valuation), actually having dropped below 10, which is rare. Its Outlook score is 64, which is unusually low for the top-ranked sector.
2. Technology (IYW) and Basic Materials (IYM) have dropped into second and third place, as the analysts have largely slowed in their upgrades of stocks in these sectors. They both dropped 14 points from last week, with a 62 and 60, respectively.
3. Healthcare (IYH) seems to have stabilized in the fourth place spot with an Outlook score of 57, followed by Energy (IYE) at 52, which is a 12-point increase from last week as some analysts came out in support of stocks within the sector.
4. Utilities (IDU), Consumer Services (IYC), and Telecom (IYZ) remain at the bottom. IYC is still not getting as much relative support from the analyst community, and despite having one of the highest projected long-term growth rates, it is still held back by the worst return on sales (poor margins) and a high projected P/E.
5. Overall, the Outlook rankings have moved to a more conservative slant this week, as the top scores are only in the low 60’s, and the top seven sectors are bunched within a 20-point spread. The resurgence in Financials is a positive sign, but I’d like to see Industrial above 50 along with an improvement in Consumer Services to create a more bullish overall ranking.
6. Looking at the Bull scores, Energy and Basic Materials are the clear leaders on strong market days, scoring 64 and 63. Utilities is by far the weakest with a 42.
7. As for the Bear scores, Utilities is the clear investor favorite on weak market days with a score of 62, with Consumer Goods a distant second. Industrial and Financial share the lowest score at 45.
Overall, Basic Materials (IYM) still displays the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives it a total score of 168. Energy (IYE) continues to have the best combination of Bull/Bear with a total score of 111.
Top ranked stocks in Financial and Technology include Grupo Financiero Galicia S.A. (GGAL), Signature Bank New York (SBNY), Keynote Systems (KEYN), and Apple (AAPL).
Low ranked stocks in Consumer Services and Telecom include Corinthian Colleges (COCO), Six Flags Entertainment (SIX), Leap Wireless (LEAP), and Globalstar (GSAT).
These scores represent the view that the Financial and Technology sectors may be relatively undervalued overall, while Consumer Services and Telecom 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.
