Bulls have refused to let the market break down. Last week, the ECB’s Mario Draghi came to the rescue by pledging to do "whatever it takes" to support the euro, which launched a big rally to close the week. Still, investors have been eagerly anticipating an announcement of something more concrete, like some bold new action from the central banks -- i.e., more global liquidity. After all, it has been such stimulus that has driven all periods of market strength since the March 2009 V-bottom.
The FOMC on Wednesday provided no comments regarding a QE3, and there was some mild disappointment. So, next up are the ECB and Bank of England. SPY closed Wednesday at 137.59, after bouncing last week from the convergence of the bottom of the bullish rising channel, the 50-day simple moving average, and a previous support level at 134. It also broke convincingly above the upper line of the neutral symmetrical triangle and remains above both the 50-day and 100-day simple moving averages and firmly in the middle of its rising channel. It’s all nicely bullish, but in need of more volume.
The VIX (CBOE Market Volatility Index -- a.k.a. "fear gauge") closed Wednesday at 18.96, which is comfortably below the 20 level, although it touched slightly above 20 on Monday. No discernible fear expressed here.
Worth mentioning, however, is that the late July rally was led by defensive sectors like utilities, consumer staples and healthcare, which is admittedly a bit concerning.
The table below ranks each of the 10 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. In addition, the table also shows our proprietary "Bull Score" and "Bear Score" for each ETF.
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. 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. Financial (IYF) retains the top spot with an Outlook score of 76. Stocks within IYF are getting good analyst support and insider buying, and they have relatively low forward P/Es. Technology (IYW) is in the second spot with a 72. Stocks within IYW are displaying relatively low forward P/Es, as well, along with strong return ratios.
2. Healthcare (IYH) also scores a 72, while Consumer Goods (IYK) rises to fourth place. These rankings have stabilized on the bullish side of the fence after looking more cautious last week. Six of the 10 sectors are scoring 50 or higher, which is bullish, but Consumer Services (IYC) and Basic Materials (IYM) remain well below 50, which is not so bullish.
3. Telecom (IYZ) stays at the bottom of the Outlook rankings this week with an Outlook score of 20. However, its score has been rising a bit as Wall Street has been supportive and their long-term growth projections have increased, although it remains saddled with the highest (worst) forward P/E and the worst return ratios. Basic Materials continues to drop as Wall Street analysts have been hammering stocks within the sector with reduced earnings estimates.
4. Looking at the Bull Scores, Energy (IYE) is the clear leader on strong market days, scoring 62. Utilities (IDU) is still by far the weakest on strong days, scoring 39. 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 remains the strong investor favorite "safe haven" on weak market days, scoring 68. Although Basic Materials is an investor favorite on strong market days, the sector has been abandoned (relatively speaking) by investors during market weakness, as reflected by its low Bear Score of 41. In other words, Materials stocks have tended to sell off the most when the market is pulling back, while Utilities stocks have held up the best.
6. Overall, Financials shows the best all-weather combination of Outlook/Bull/Bear Scores. Adding up the three scores gives a total of 182. Basic Materials is the worst at 125, and it also displays the worst combination of Bull/Bear with a 98. Telecom displays the best Bull/Bear of 111.
These scores represent the view that the Financial and Technology sectors may be relatively undervalued overall, while the Telecom and Basic Materials sectors may be relatively overvalued, based on our one- to three-month forward look.
Top-ranked stocks within Financial and Technology sectors include Altisource Portfolio Solutions (ASPS), BB&T Corp. (BBT), Seagate Technology (STX), and Apple (AAPL). After disappointing in the latest earnings announcement, Apple is back above $600 as investors just can’t do without the stock for very long.
Disclosure: Author has no positions in stocks or ETFs mentioned.