Sector Detector: Energy and Healthcare Take Top Spots

The market has gone straight up over the past week since beginning the month of March by breaking through its 50-day moving average. The top and bottom of Sabrient’s SectorCast-ETF rankings look pretty similar to last week, although there has been some shuffling as Energy takes the top spot and Healthcare re-emerges in the top two.

Notably, Consumer Discretionary continues to rise in the rankings at the expense of Information Technology. One might think that they would move in the same direction since they are both cyclical in nature, but the main difference is that InfoTech is more heavily dependent on business spending while Consumer Discretionary (by definition) is tied to consumer spending. In any case, they continue to diverge in our rankings – this time in the opposite direction to how they were scoring last month.

Latest rankings: This week, the top sectors in SectorCast-ETF are no longer so tightly bunched. Last week, the top four were within five points of one another, but this week the bunching is in the middle as Energy (XLE) has clearly jumped ahead of the pack to top the rankings with a score of 78. Financials, which led the rankings for the past three weeks, is now in third place, with Healthcare (XLV) reinserting itself in second place with a 72.

XLE boasts the top score in projected year-over-year change in earnings across the sector and also shows the best (lowest) projected price/earnings ratio. It also scores highly in the percentage of analysts’ positive revisions to earnings estimates. XLV doesn’t stand out in anything in particular (except perhaps recent return on equity), but it scores reasonably well across all of the relevant factors in the model.

Top-ranked stocks within XLE and XLV include Marathon Oil (NYSE: MRO), Diamond Offshore (NYSE: DO), Bristol-Meyers Squibb (NYSE: BMY), and WellPoint (NYSE: WLP).

At the bottom of the rankings, we see that Telecom and Industrials have switched places from last week, with Telecommunications (IYZ) returning to its former place in the cellar with a low score of 37. Industrials (XLI) is now in the ninth spot with a score of 43, Telecom received more analyst downgrades to earnings estimates during the week, while Industrials still sports the worst (highest) projected P/E.

Low-ranked stocks within XLI and IYZ include C.H. Robinson Worldwide (Nasdaq: CHRW), Caterpillar (NYSE: CAT), Cbeyond, Inc. (Nasdaq: CBEY), and Global Crossing Ltd. (Nasdaq: GLBC).

These scores represent the view that Energy and Healthcare stocks may be undervalued overall, while Telecom and Industrials stocks still may be overvalued.

Performance: The table below shows the performance of each of the prior four weekly portfolios as of the market close on Tuesday, 3/9/2010.

As the market has continued to rally, long position XLF has outperformed the SPY, but so have both of our short positions. And with XLE lagging a tad, the net performance of our long/short portfolio has worsened. When the market is in rally mode, it can be hard to compare a market neutral long/short strategy against a straight long position in the SPY.

We are only seeking to capture the positive performance spread between the long and short positions, and when the market breaks through its 50-day moving average and keeps going like it has, the fundamentally weaker (more speculative) stocks will often lead, as has been the case. Nevertheless, as the market continues to stretch above its moving averages into overbought territory, an absolute return approach remains warranted.

Disclosure: Author has no positions in stocks or ETFs mentioned.

Comments

[Wallyjr]

what's going on with UNG. It's at a low but seems to keep getting lower. Should I dump it?

Mar 10 10:19 AM

[Steve in TN]

It looks like to me that UNG is getting ready for a bounce. For the last couple of months it has hit a plateau and seems to be flattening out. The problem with UNG is the way it is constructed - the use of NG futures with rolling over their positions at the end of the month. This currently ensures that UNG will not keep up with the NG spot price but that doesn't preclude a good short-term bounce.

Mar 10 10:38 AM

[intrigued investor]

I am surprised people are still holding on to UNG, over the past year it has underperformed its index by 65%. If you do not know, it does not return the Natual Gas spot price and if contango continues, every month it rolls the investor is going to lose.

Mar 10 11:41 AM

[Scott Martindale]

I believe that natural gas is a great value now, for long-term investing, but UNG has been a great disappointment as a proxy. Perhaps an alternative is FCG, which tracks a selection of energy stocks that derive a large portion of their revenues from natural gas production.

Mar 11 09:38 PM