Sector Detector: Bulls Leverage Hopeful News To Launch A Tepid Breakout Attempt

Our annual Baker’s Dozen portfolio of 13 top picks for the year is up about +18% since its January 13 launch and continues to pull away from the field on this third-party performance tracking site. Our annual portfolio also strongly outperformed the other diversified portfolios over the prior two years since this site began tracking us. Baker’s Dozen represents a sector-diversified group of stocks based on our Growth At a Reasonable Price (GARP) quant model and confirmed by a rigorous forensic accounting review by our subsidiary Gradient Analytics to help us avoid the landmines.

Among industries, airlines and biotech have been hot. Southwest Airlines LUV is the best performer in the S&P 500 this year, and it is one of the top performers in our Baker’s Dozen portfolio, as is Actavis plc (ACT), a biopharma. Last year, our top performers in the Baker’s Dozen included Jazz Pharmaceuticals JAZZ and Alaska Air Group ALK, and both are still highly ranked in our system. Another strong group are the energy service companies that support hydraulic fracturing, and Hi-Crush Partners LP (HCLP) is one of our top performing picks this year, as well.

SPY chart review:

The SPDR S&P 500 Trust SPY closed last Friday at 200.61. After failing to confirm a breakout above resistance at 200 the prior week, it started last week as if it would pull back to test the 50-day simple moving average around 197.5, but instead rallied to regain its 20-day SMA and confirm a breakout (albeit tepid) above 200. But after Friday’s weakness, it is once again sitting right on support from the 20-day, and the breakout seems at risk of failure. Oscillators RSI, MACD, and Slow Stochastic were each pointing down bearishly the prior Friday, as I discussed in last week’s article, but after a brief reversal last week, they look to be pointing down bearishly once again.

SPY chart

Although both the Dow Jones Industrials and Transports rose to new closing highs last Thursday, keeping Dow Theory buy signal intact, the challenge for bullish investors still remains recruiting enough new bullish conviction to break out in earnest. However, the Russell 2000 small cap index is not cooperating. It is at a critical juncture, with its 50-, 100-, and 200-day SMAs having all converged at the same spot, and its price closed just below all three on Friday. The bulls will need to get small caps onboard the happy train soon. Although the blue chips are capable of leading the market higher without help from small caps, the higher-odds outcome would be perpetual consolidation and slogging through the mud rather than a robust year-end rally.

Latest sector rankings:

Relative sector rankings are based on our proprietary SectorCast model, which builds a composite profile of each equity ETF based on bottom-up aggregate scoring of the constituent stocks. The Outlook Scoreemploys a forward-looking, fundamentals-based multifactor algorithm considering forward valuation, historical and projected earnings growth, the dynamics of Wall Street analysts’ consensus earnings estimates and recent revisions (up or down), quality and sustainability of reported earnings (forensic accounting), and various return ratios. It helps us predict relative performance over the next 1-3 months.

In addition, SectorCast computes a Bull Score and Bear Score for each ETF based on recent price behavior of the constituent stocks on particularly strong and weak market days. High Bull score indicates that stocks within the ETF recently have tended toward relative outperformance when the market is strong, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well (i.e., safe havens) when the market is weak.

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The author has no positions in stocks or ETFs mentioned. The materials available from us are published solely for informational purposes. They are not to be construed as advice or ...

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