Despite an environment of uninspiring economic reports, stocks have regained their footing once again. Last week, bulls found that they simply couldn't ignore the Boston bombing like all the other worrisome news, but the quick capture of the perpetrators has removed the domestic terrorism cloud. Yes, we are in an environment in which stocks may stumble temporarily, but bears are having a devil of a time making them fall.
Perhaps the generally cautious direction of the equity inflows is playing a role in market stability. Although the general rule is that a healthy bull market is led by economically-sensitive sectors, in this case it appears that investors are seeking the defensive sectors because they don't intend to pull money out any time soon. In many cases, they are investing for yield from equities because fixed income yield is so pathetic. That means dividend-paying blue chips, value stocks, and steady-eddy utilities and consumer staples.
This is not the standard definition of "risk-on." Some would say it is the hallmark of a tenuous bull. But perhaps it is indicating that a true risk-on phase of equity investment is still yet to come. That certainly would be bullish.
Looking at the chart of the S&P500 SPDR Trust (NYSEARCA:SPY), it closed Wednesday at 157.88. Last week, it lost short-term support at its 20-day simple moving average, but found reliable support at both the important 50-day SMA and the bottom line of the sideways channel at 153.5. It then moved steadily higher right through Wednesday of this week. It was a classic bounce at strong support, and now the sideways trading channel appears to have widened from 153.5-157 to 153.5-160. Of course, 160 on the SPY corresponds with 1600 on the S&P 500, which is psychological resistance. I also have drawn a potential rising channel that might be forming.
The CBOE Market Volatility Index (VIX), a.k.a. "fear gauge," closed Wednesday at 13.61. Even on spikes, it has not come close to challenging the important 20 level.
Latest rankings: The table ranks each of the ten U.S. industrial sector iShares ETFs by our 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 our 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.
1. Technology (NYSEARCA:IYW) moves back to the top ranking with an Outlook score of 78, followed by defensive sector Consumer Goods (NYSEARCA:IYK) at 72. Last week's top-ranked sector Financial (NYSEARCA:IYF) falls all the way to fifth this week at 59. IYW continues to display a low forward P/E, strong projected long-term growth, and the best trailing return ratios, while IYK moved up on the basis of its favorable return ratios and strong support among Wall Street analysts (i.e., net upgrades in forward earnings estimates). In fact, defensive sectors Telecom (NYSEARCA:IYZ), Utilities (NYSEARCA:IDU), and Consumer Goods all show the most improvement in sell-side support.
2. Nevertheless, Telecom stays in the cellar with an Outlook score of 0. It is weak in forward P/E, long-term projected growth, and trailing return ratios. It is joined in the bottom two again this week by Basic Materials (NYSEARCA:IYM), which continues to be pummeled by Wall Street earnings downgrades.
3. This week's rankings maintain an overall neutral tone, with a very slight bullish bias given that Tech, Energy, and Financial are all in the top five.
4. Looking at the Bull scores, Financial is the leader on particularly strong market days, scoring 56, followed closely by Consumer Goods , Consumer Services (NYSEARCA:IYC), and Healthcare (NYSEARCA:IYH). Basic Materials is the laggard on strong market days, scoring 47. But the top-bottom spread is quite narrow at only 9 points, which continues to indicate high sector correlation on strongly bullish days.
5. Looking at the Bear scores, Utilities is serving as the favorite "safe haven" on weak market days, scoring 65, while Basic Materials is the worst during extreme market weakness as reflected in its low Bear score of 44. The top-bottom spread is 21 points, which continues to indicate lower correlations on weak market days -- i.e., it pays to be in the safe sectors when the market is bearish.
These Outlook scores represent the view that Technology and Consumer Goods sectors may be relatively undervalued, while Telecom and Basic Materials sectors may be relatively overvalued based on our 1-3 month forward look.