y - it s highest level since January 2008, while the Nasdaq is at a
level not seen since toppling from its "irrational exuberance" days
of late-2000 as the Internet bubble was bursting. The ECB seems to
be getting a workable plan together to support the eurozone banking
system and sovereign debt. The German Constitutional Court elected
not to block the plan for a European Stability Mechanism rescue
fund, which pleased global investors. Now all eyes await the next
in a series of statements from central bankers - this time from our
own FOMC and Chairman Bernanke on Thursday.
Many of the sector iShares are near their all-time highs,
including Healthcare (
), Consumer Services (
), and Consumer Goods (
). Telecom (
) is at a 52-week high. And economically-sensitive sectors like
), Materials (IYM), Energy (IYE), and Industrial (IYJ) are all on
upward trajectories, ostensibly in anticipation of stimuli from
both the ECB and FOMC. In particular, IYM has taken a sudden leap
over the past week above all of its moving averages to lead all
sectors. Only safe haven Utilities (IDU) is down from its price at
the beginning of August, al though defensive-oriented Consumer
Goods appears to be quickly retreating from its highs. Notably,
small caps and mid caps both have been greatly outperforming the
large caps since August 1.
Emerging markets also have taken a positive turn over the past
week, but the U.S. still looks like the place to be for global
investors. Despite data showing net outflows from domestic equity
mutual funds, U.S. stocks are strong. The presumption is that
foreign investment continues to flood into our equity markets. If
individual investors decide to get on the bandwagon, stocks could
really get bullish.
As usual, Apple (AAPL) did its part to keep investors and
consumers forking over the dough as the company unveiled its
highly-anticipated iPhone 5 on Wednesday, calling it "the most
beautiful consumer device that we've ever created." It boasts
greater processing power, 4G LTE compatibility, longer battery
life, an improved camera that shoots up to 1080p video, and a
larger screen (4 inches rather than 3.5 inches). They also
introduced an all-new iPod touch (with the "Retina" display) and a
reinvented iPod nano. Loyalists are pleased, I'm sure, and will
likely start upgrading from perfectly good equipment immediately -
w hether or not they really need the new features and whether or
not they can truly afford the upgrade. (No wonder outstanding
consumer credit has been increasing.) Such is life for the most
dominant corporate juggernaut of the 21st Century, better known as
Apple. The stock hit another all-time high above $683 on
Sadly, Wednesday also gave us yet another example of how easy it
is for any crackpot or agitator with a video camera and Internet
access to foment a culture clash and virtually destabilize the
world. U.S. Ambassador to Libya Chris Stevens - a true friend to
the Libyan people, and in fact all Arabs and Muslims fed up with
oppression - was the latest casualty when murderous protests
erupted over some obscure low-budget film posted to YouTube by an
unknown Israeli-American that was highly offensive to Islam.
The Information Age has created instant communication across a
planet that houses religions and cultures that cannot peacefully
coexist under the best of circumstances and intentions. Want to
create global chaos? Simply use your iPhone to film yourself
burning a Quran or disrespecting Prophet Muhammad and then upload
it to YouTube. In this country, we might respond to such behavior
by voicing disapproval, or better yet, withholding the attention it
seeks. But when it is viewed in fundamentalist societies elsewhere,
buildings burn and innocents die. Any American- whether friend or
foe - au tomatically becomes a target of extremists, akin to a KKK
lynching. It's at once irrational, medieval, horrifying, thuggish,
Let's move on to the charts. The S&P 500 SPDR Trust (SPY)
closed Wednesday at 144.39. The 140 level has held as strong
support. It has been trading within a bullish rising channel since
the beginning of June. A bullish ascending triangle within the
rising channel appeared to have failed last week, but perhaps I was
drawing it too tightly. The lower of the two lines shown seems to
have held as price broke out last Thursday above the 142 resistance
line from April-May. However, SPY still remains within the
long-established rising channel. Price is back above the 20-, 50-,
100- and 200-day SMAs. The oscillators like RSI, MACD, and Slow
Stochastic are getting somewhat overbought as price straddles the
upper Bollinger Band, so some kind of pullback might be in
If markets do pull back from here, there are several interim
support levels, including resistance-turned-support at 142, prior
support at 140, the rising 50-day SMA (near 140), the bottom of the
rising channel near 139, the 100-day SMA (turning up and nearing
137), and then the 200-day SMA near 135.
The CBOE Market Volatility Index (VIX), a.k.a. "fear gauge,"
fell back down to test support from the August lows around 14, and
then closed Wednesday at 15.80. RSI and MACD are both near the
neutral line but look as though they could fall further, which
would be bullish for stocks.
Despite the market's strength and persistently high
correlation,we have continued to identify stocks with a high
probability of underperformance due to forensic accounting issues.
Most recently, negatively-graded companies like Titan Machinery
(TITN), International Rectifier (IRF), and Vera Bradley (VRA) have
fallen after their quarterly earnings reports disappointed
The table ranks each of the ten U.S. industrial sector iShares
, 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
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
1. Technology (IYW) remains in the top spot with a score of 80.
Stocks within IYW are displaying relatively low forward P/Es,
strong projected long-term growth, and solid return ratios.
However, the analysts have been reducing forward earnings estimates
overall. Healthcare returns to the second spot with a 74, as stocks
within the sector regained some support from Wall Street analysts
relative to Consumer Goods, which fell to fourth place behind
2. Telecom stays at the bottom of the Outlook rankings this week
with an anemic Outlook score of 4. Stocks within the sector are
hobbled by the highest forward P/Es and the worst return ratios,
plus net downgrades from Wall Street. Utilities remains in the
bottom two with a score of 30, just below Basic Materials at 31,
which got hit with additional analyst downgrades. IDU continues to
be hampered by a high forward P/E and the worst projected long-term
3. Overall, I would categorize the rankings as neutral, with
conservative sectors like Consumer Goods and Healthcare in the top
5, joining economically-sensitive sectors Technology and Financial
as the only sector iShares scoring above 50.
4. Looking at the Bull scores, Energy is the clear leader on
strong market days, scoring 63. Utilities is still by far the
weakest on strong days, scoring 38. In other words, Energy stocks
have tended to perform the best when the market is rallying, while
Utilities stocks have lagged.
5. Looking at the Bear scores, Utilities continues to lose its
status as investors' favorite "safe haven" on weak market days.
Surprisingly, Consumer Services has been holding up quite well on
weaker days, although admittedly there haven't been many lately.
Basic Materials has been abandoned the most by investors during
market weakness, as reflected by its low Bear score of 44, which is
just slightly worse than Energy and, surprisingly, Technology. In
other words, Materials stocks have tended to sell off the most when
the market is pulling back, while Consumer Services stocks have
held up the best.
6. Overall, Technology again shows the best all-weather
combination of Outlook/Bull/Bear scores. Adding up the three scores
gives a total of 182. Telecom is the worst at 102. As for Bull/Bear
combination, Energy is the best at 108, while Utilities is by far
the worst with a dismal 89.
These scores represent the view that the Technology and
Healthcare sectors may be relatively undervalued overall, while
Telecom and Utilities sectors may be relatively overvalued based on
our 1-3 month forward look.
Top-ranked stocks within IYW and IYH include Cognizant
Technology Solutions (CTSH), CACI International (CACI), Edwards
Lifesciences (EW), and Watson Pharmaceuticals (WPI).
Author has no positions in stocks or ETFs mentioned.
Rankings are based on Sabrient's SectorCast model, which builds a
composite profile of each equity ETF based on bottom-up aggregate
scoring of the constituent stocks. The
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
1-3 month forward look.
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
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 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.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Retirement Strategy: An Update Of Our 'Team Alpha'
Portfolio That Continues To Outperform