Although the initial market reaction to the ISM reports was muted, both the manufacturing and non-manufacturing reports from the Institute for Supply Management showed considerable strength. The headline indexes both exceeded the consensus numbers and even the high range of the consensus ranges. The PMI made the most dramatic move by increasing 1.9, jumping the 50% mark at a 51.5%, which was 1.8% over the consensus and 0.9% over the high range of the consensus range. The NMI also increased an acceptable 1.4 to 55.1% after an increase of 1.1% last month. This made this month the 33rd consecutive month the index was above the 50% mark, indicating continued growth.
Even with this broadly positive news, there were a few points of concern. With the manufacturing sectors, sub-indexes broadly increased, including employment up by 3.1 to 54.7%, the only ongoing concern is input prices. The price index jumped 4 points to 58% and the rate for commodities going up in price was 11, including 5 that were multiple months up in price. Input prices for the non-manufacturing sectors are of greater concern as the price index jumped 3.8 to 64.3%. That was a continuation of a meteoric rise since June 2012 at a below 50 reading of 48.9%. Even more dramatic was the lop-sided aspect of respondents stating prices are rising, with those stating prices are declining at 28% and 1%, respectively. Sixteen out of the 18 industries reported increases in prices and none responded with decreases in input prices.
The other sub-indexes of the non-manufacturing sectors were that new export dropped 1.5 to 50.5% and employment slid 2.7 to 51.1%. As the chart below shows, the employment index has been struggling to maintain consistent growth above the 50% mark.
(click to enlarge)
Bull Stock Picks based on Changes in PMI and NMI
This month's regression analysis used the headline indexes of the manufacturing and non-manufacturing sectors. Unlike using the underlying indexes of the non-manufacturing sectors, this used just the headline numbers for both indexes for the independent variables. The group of stocks that performed best based on positive correlations with the indexes we call "Lovers". These Lovers returned annually over 13 1/2 and nearly 5% over the S&P 500 flat weighted index for the backtest since July 2000.
A reader asked last month if I could provide more information as to the relative strengths of each of the picks based on the regressions. This information allows users to determine relative strengths between choices with under- and over-weighting them. In the complete portfolio, they determine the percentage holdings of each stock position. Below are the results filtered by Sabrient System's latest ratings and the R squared values.
Strong Buy Rated Bulls with R^2:
Applied Industrial Technologies, Inc. (ATI) 0.342723886935677
Caterpillar Inc. (CAT) 0.563922630861981
CareFusion Corporation (CFN) 0.439254597463529
Genworth Financial, Inc. (GNW) 0.492024282251121
JetBlue Airways Corporation (JBLU) 0.288999169632203
M/I Homes, Inc. (MHO) 0.49323201308436
Buy Rated Bulls with R^2:
Deluxe Corporation (DLX) 0.453322342612923
Drew Industries Incorporated (DW) 0.446593905125887
Hanmi Financial Corporation (HAFC) 0.410652656257976
The Hartford Financial Services Group, Inc. (HIG) 0.574410230386377
Heartland Payment Systems, Inc. (HPY) 0.459851536012491
Principal Financial Group, Inc. (PFG) 0.612435113803754
Rock-Tenn Company (RKT) 0.30618498772903
Select Comfort Corporation (SCSS) 0.50300726356263
Symmetry Medical Inc. (SMA) 0.428553507840111
Trinity Industries, Inc. (TRN) 0.570672262226576
Coventry Health Care, Inc.(CVH) 0.301769455343444
Helix Energy Solutions Group, Inc. (HLX) 0.463508539630128
Portfolio Recovery Associates, Inc. (PRAA) 0.444450507213411
Smithfield Foods, Inc. (SFD) 0.367985195652635
Long Rankings
The Sabrient Long Rankings stocks that are poised to outperform the market based on our backtested strategies. Stocks are segmented into categories which include value stocks, high-growth stocks, GARP stocks, and others. Many Sabrient products are derived from the Long Rankings.
Disclosure: I am long DLX.
Additional disclosure: I am long DLX. I am long as part of the Rock Solid Yields | Sabrient Systems.
