Fundamentals Suggest Impressive Risk-On Recovery Will Continue

SectorCast ETF rankings

Here are some of my observations on this week’s scores:

1.  Financial remains in the top spot with an Outlook score of 79. It displays an attractive forward P/E of 14.6x, a good forward year-over-year EPS growth rate of 14.0%, a forward PEG (ratio of forward P/E to forward EPS growth rate) of 1.05, good insider sentiment (open market buying), and good sell-side analyst sentiment (net positive revisions to EPS estimates), since most of the sectors have been seeing negative revisions. Telecom stays in the second spot with an Outlook score of 75, as it displays the lowest forward P/E of 13.6x and good return ratios. However, it has absorbed some significant reductions to earnings estimates and its pure GARP metrics are only average, with projected year-over-year EPS growth rate of only 8.6% and a forward PEG ratio of 1.57, which ranks it only 7th out of 10 sectors on PEG (this is why we don’t see many Telecoms as candidates for Sabrient’s GARP portfolios, which have a 12-24 month outlook rather than 3-6 months). Industrial remains in third with reasonably solid scores across the board. Technology, Healthcare, Consumer Services (Discretionary/Cyclical), and Basic Materials round out the top seven.

2.  At the bottom of the rankings we find Energy and Consumer Goods (Staples/Noncyclical). Energy continues to get hit with downward earnings revisions for 2019 (although 2020 looks much better), and it has the highest forward P/E of 19.5x (least attractive, and weak return ratios, although it also displays the strongest projected year-over-year EPS growth rate of 27% and the lowest forward PEG of 0.72 (which has increased quite a bit since last month).

3.  Looking at the Bull scores, Technology enjoys the top score of 58, followed by Energy and Healthcare at 54, as stocks within these sectors have displayed relative strength on strong market days. Defensive sector Utilities scores the lowest at 38. The top-bottom spread is 20 points, which reflects low sector correlations on strong market days. It is desirable in a healthy market to see low correlations reflected in a top-bottom spread of at least 20 points, which indicates that investors have clear preferences in the market segments and stocks they want to hold (rather than broad risk-on behavior).

4.  Looking at the Bear scores, as usual we find defensive sector Utilities alone in the top spot with a score of 60, followed by Financial at 57 and Consumer Goods at 56, which means that stocks within these sectors have been the preferred safe havens lately on weak market days. Technology has the lowest score of 39, as investors have fled during recent market weakness. The top-bottom spread is 21 points, which reflects low sector correlations on weak market days. Ideally, certain sectors will hold up relatively well while others are selling off (rather than broad risk-off behavior), so it is desirable in a healthy market to see low correlations reflected in a top-bottom spread of at least 20 points.

5.  Financial displays the best all-around combination of Outlook/Bull/Bear scores, followed by Telecom, while Energy is the worst. Looking at just the Bull/Bear combination, Consumer Goods is the best, followed by Materials (which has the better balance between the Bull and Bear scores), indicating superior relative performance (on average) in extreme market conditions (whether bullish or bearish), while Energy scores the worst.

6.  This week’s fundamentals-based Outlook rankings reflect a bullish bias, given that five of the top seven sectors are economically-sensitive or cyclical, and one (Healthcare) is all-weather. Keep in mind, the Outlook Rank does not include timing, momentum, or relative strength factors, but rather reflects the consensus fundamental expectations at a given point in time for individual stocks, aggregated by sector.

ETF Trading Ideas:

Our Sector Rotation model, which appropriately weights Outlook, Bull, and Bear scores in accordance with the overall market’s prevailing trend (bullish, neutral, or defensive), now displays a bullish bias and suggests holding Technology (IYW), Telecom (IYZ), and Industrials (IYJ), in that order. (Note: In this model, we consider the bias to be bullish from a rules-based trend-following standpoint when SPY is above both its 50-day and 200-day simple moving averages.)

Besides iShares’ IYW, IYZ, and IYJ, other highly-ranked ETFs in our SectorCast model (which scores nearly 500 US-listed equity ETFs) from the Technology, Telecom, and Industrial sectors include ProShares Ultra Semiconductors (USD), ProShares Ultra Telecommunications (LTL), and VanEck Vectors Steel (SLX).

If you prefer a neutral bias, the Sector Rotation model suggests holding Financial, Telecom, and Industrial, in that order. On the other hand, if you are more comfortable with a defensive stance on the market, the model suggests holding Financial, Utilities, and Telecom, in that order.

An assortment of other interesting ETFs that are scoring well in our latest rankings include WBI BullBear Yield 2000 (WBIC), SPDR S&P Capital Markets (KCE), First Trust NASDAQ Bank (FTXO), Global X SuperDividend REIT (SRET), Oppenheimer S&P Financials Revenue (RWW), WBI BullBear Value 1000 (WBIF), InfraCap MLP (AMZA), SPDR S&P Buyback (SPYB), WisdomTree US SmallCap Quality Dividend Growth (DGRS), SPDR S&P Pharmaceuticals (XPH), Pacer US Cash Cows 100 (COWZ), ALPS Alerian MLP (AMLP), ProShares Ultra Nasdaq Biotechnology (BIB), and VanEck Vectors Uranium Nuclear Energy (NLR).

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Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account ...

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