Rankings Move To Neutral While Bulls Refuse To Yield

by: Scott Martindale

Well, Punxsutawney Phil didn't see his shadow on Saturday, so the weather forecast is positive. However, investors having their own version of Groundhog Day at Dow 14,000 are still trying to decide whether to retreat to safety in anticipation of a severe market pullback. Tuesday's weakness seemed like the start of a correction, and indeed Sabrient's quantitative SectorCast rankings of the 10 U.S. sector iShares have taken a neutral turn after getting more bullish the past two weeks. But alas the bulls are having none of that.

And why not? Today, the Fed remains accommodative, still pumping $85 billion per month into mortgage-backed securities and Treasuries. Manufacturing is looking stronger. Jobs growth is ever so gradually accelerating. Corporate profits are generally stronger than expected. And the U.S. economy continues to expand while Europe stabilizes. VIX remains historically low. There's lots of cash in corporate coffers and on the sidelines, itching to get in on the action. The "risk-on/risk-off" asset allocation theme (with high equity correlations) appears to be giving way to a lower-correlation stock-picking climate. Overall, equities should continue to attract investors in this environment.

Consolidation rather than steep correction is still the market's M.O. Although bulls are struggling to turn yet another resistance level into a new launch pad, we have seen this dance before numerous times since mid-November-and really since the Fed quant easing programs launched the March 2009 V-bottom. The all-time intraday high for the S&P500 at 1576 (and 1565 closing high) sure seem to be in play for 2013 as many market commentators are thinking we have entered a secular bull market.

Of course, the ongoing Federal budget negotiations and looming sequester deadline on March 1 are the proverbial elephant in the room. But another possible fly in the ointment was pointed out by Mark Hulbert on MarketWatch on Wednesday when he noted that insiders are aggressively selling shares at an alarming pace. He says the last time the weekly sell-to-buy ratio was worse was in late July 2011, just before the debt-ceiling debacle and resultant U.S. credit rating downgrade. As you recall, the Dow eventually fell 2,000 points.

The S&P500 SPDR Trust (NYSEARCA:SPY) closed Wednesday at 151.16 as it continues a slow technical consolidation since breaking out above tough psychological resistance at 150. The 50-day simple moving average has held after crossing bullishly through the 100-day SMA. Oscillators RSI and MACD have been slow to cycle back down from overbought, while Slow Stochastic is flat-lining at the neutral line.

SPY chart

Since Friday's burst back through 150, SPY has spent the first three days this week testing resistance-turned-support and consolidating within a sideways channel. The uptrend line of support starting from the bottom of the New Year's gap might ultimately turn into the pole of a bull flag continuation pattern. Until the market can resume its uptrend, the New Year's gap between 142 and 145 is going to act as something of a magnet, since gaps tend to get at least partially filled. After the uptrend line, next support levels are 150, 148, and then the convergence of the 50-day SMA and the top of the gap at 145.

The CBOE Market Volatility Index (VIX), a.k.a. "fear gauge," closed Wednesday at 13.41, and 14 seems to be offering some resistance, which of course is bullish for equities.

Although the frothy technicals and insider selling are worrisome, overall the odds are that the market resumes its uptrend.

Latest rankings: The table ranks each of the ten U.S. industrial sector iShares (ETFs) by Sabrient's 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 Sabrient's 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.

Sabrient SectorCast ETF rankings


1. Not much changed in this week's rankings. Technology (NYSEARCA:IYW) stays in the top spot with a score of 81, while Healthcare (NYSEARCA:IYH) moves back into second place by one point in its battle with Financial (NYSEARCA:IYF). IYW shows strong projected growth and the best forward valuation, as well as solid return ratios. IYH got some renewed support from Wall Street analysts, although IYF is actually enjoying the most net upgrades.

2. Telecom (BATS:IYZ) stays in the cellar with a dismal Outlook score of 3, as Wall Street has continued to slash estimates. It is again joined in the bottom two this week by Basic Materials (NYSEARCA:IYM) with a 26 as analysts continued to slash away at forward estimates in the sector.

3. Overall, this week's rankings are a little less bullish than last week. Industrial (BATS:IYJ) and Consumer Services (NYSEARCA:IYC) both fell in their scores, while defensive sectors Consumer Goods (NYSEARCA:IYK) and Healthcare rose.

4. Looking at the Bull scores, Energy (NYSEARCA:IYE) is the leader on strong market days, scoring 56, while Consumer Goods is the laggard on strong market days, scoring 46. This is only a 10-point range from top to bottom, which indicates high correlation on particularly strong market days. Energy stocks have tended to perform the best when the market is rallying, while Consumer Goods stocks have lagged.

5. Looking at the Bear scores, Basic Materials , which used to be among the worst on weak days, is scoring the highest at 52. Energy is the worst during market weakness, as reflected in its low Bear score of 40. But there's still only a 12-point range from top to bottom, which indicates high correlation on particularly weak market days. Energy stocks, which are the strongest on particularly strong market days, have been selling off the most when the market is pulling back, while Materials stocks have held up the best, relatively speaking.

6. Overall, Technology shows the best all-weather combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 178, followed by Financial at 175. Telecom is by far the worst at 98. Looking at just the Bull/Bear combination, Consumer Goods is the lowest at 92, while Basic Materials has the best score at 106, followed by Financial at 104. This indicates that Materials stocks have tended to perform relatively well lately in all market conditions.

These scores represent the view that the Technology and Healthcare sectors may be relatively undervalued overall, while Telecom and Basic Materials sectors may be relatively overvalued based on our 1-3 month forward look.

Top-ranked stocks within IYW and IYH include F5 Networks (NASDAQ:FFIV), 3D Systems (NYSE:DDD), MEDNAX (NYSE:MD), and Humana (NYSE:HUM).

Disclosure: 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.