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Earning and sector RS

This week was shorter than usual, but market gave a great signal of strength. Even after a bad beginning (Monday was full of negative news and indexes dropped), stocks found the way to recover the uptrend thanks to a good earning season. Below I’m going to make a summary about what’s going on.

Indexes rose with the Dow 30 that looks the healthiest. It broke the recent highs, without gaps, and the resistance stands at 13.000. Nasdaq 100 and S&P500 rose with gaps, and I believe a correction would be healthy. I think that it could be used to buy some stocks.

Lets’ go to earnings. Thanks to Bloomberg (Chart 1)you can see how is going the earning season for S&P500. So far 121 released earnings and the surprise beat disappointment 99-19. Best surprises came from Healthcare and Industrial.. Financial was good as well, together with technology and basic materials.
CHART 1 - EPS SURPRISE
ESP SURPRISE

In Chart 2 I can see the EPS growth trend in the last 4 quarters (the actual stands as Q) and the expectation for the next 3. We see that there’s a general slowdown of the trend, that’s normal because the recover is in a mature cycle. Few sectors showed an acceleration in the last Quarter: basic material, Industrials, consumer goods, utilities, technology. A disappointing one is telecoms but not significant at the moment. You can see that market expects the EPS slowdown to continue in the next quarter, except for some sectors such as Oil&gas, Basic Materials (the commodity game).

CHART 2 - EPS GROWTH
ESP GROWTH
 

And now the final question. How is reacting the market? In chart 3 you can see the weekly strength chart with the 10 group constituents of S&P.

The chart shows the relative strength of a single sector vs. the benchmark (market) on a weekly basis. You must read in a “clock direction”, where right-up is the best (Leading sector) and bottom left the worse (Lagging). You must be careful when a sector is going to bottom-right (Weaking) and left-up (improving).

To facilitate the reading, what’s happening now? Well the 2 leading sectors (Industrials and Energy) are getting weaker. Energy is on the border to became “weak”, while industrial is weaker since 2 weeks.

What are the new sector that are gaining strength? Watch on left-up:

- Utilities

- Healthcare

- Consumer Staples

- Telecoms

But you can realize that these are defensive sectors! Therefore at the moment the market is standing the global bad news, but the old leaders are getting weaker and the defensive sectors are getting stronger.

This can mean:

a) temporarily rotation in the market and in the future the old leader will return

or

b) the old leader are overbought and/or this could be the last uptrend lag of the year before a deeper correction (and you understand why gold-silver is rising a lot).

Is difficult give an answer but usually when the defensive are getting stronger isn’t a good signal for the coming months. I think investors are getting defensive because of the imminent QE2 by the Fed and realize that without it, the economy will slow significantly.
CHART 3 SECTOR RELATIVE STRENGTH

I’ll continue to monitor how this sectors will change while earning season goes on. Next week will be rich of news. But for those who want make new purchases on an eventual correction (or now if they prefer) I’d advice to consider picks in the sectors that are strengthening as well. And not only focus on the big old leaders energy and industrials. 

About my trades, I am still inside the bull spread on GLD with a sell order on the ask-price of the spread. Hope it will be executed next week if GLD continue to rise or stay flat.

This week I had an order on CAT at 100 but unfortunately rebounded earlier. I have few ideas but I’ll tell you when are executed. The alert alarm are setup because I'll be out of office.

Happy Easter to everyone.