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

Outlook score is forward-looking while Bull and Bear are backward-looking. As a group, these three scores can be helpful for positioning a portfolio for a given set of anticipated market conditions. Of course, each ETF holds a unique portfolio of stocks and position weights, so the sectors represented will score differently depending upon which set of ETFs is used. We use the iShares that represent the ten major U.S. business sectors: Financial IYF, Technology IYW, Industrial IYJ, Healthcare IYH, Consumer Goods IYK, Consumer Services IYC, Energy IYE, Basic Materials IYM, Telecommunications IYZ, and Utilities IDU. Whereas the Select Sector SPDRs only contain stocks from the S&P 500, I prefer the iShares for their larger universe and broader diversity. Fidelity also offers a group of sector ETFs with an even larger number of constituents in each.

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

1.  There is very little change in the rankings from last week. Technology still holds the top spot with the same Outlook score of 91. The sector displays relatively solid scores across most factors in the model, including the best Wall Street analyst sentiment (net upward revisions to earnings estimates), the strongest return ratios, a good forward long-term growth rate. However, the forward P/E is below average (Financial and Energy sport the lowest). Healthcare returns to the second spot this week with a score of 68 as the sector displays further improvement in both sell-side analyst sentiment (upward revisions) and insider sentiment (open market buying), as well as solid return ratios and a good long-term forward growth rate. Financial has solidified its hold on the third spot, as analyst sentiment continues to show gradual improvement. Consumer Goods/Staples and Utilities round out the top five.

2.  Telecom stays in the cellar this week with an Outlook score of 3, as the sector has low scores on most factors in the model. Consumer Services/Discretionary stays in the bottom two with a score of 20, despite the highest forward long-term growth rate.

3.  Looking at the Bull scores, Healthcare displays the strongest score of 63, while Telecom is the only sector scoring below 50, with a score of 47. The top-bottom spread is now 16 points, reflecting slightly higher sector correlations on particularly strong market days. It is generally desirable in a healthy market to see low correlations and a top-bottom spread of at least 20 points, which indicates that investors have clear preferences in the stocks they want to hold, rather than the all-boats-lifted-in-a-rising-tide mentality that dominated 2013.

4.  Looking at the Bear scores, Utilities is still scoring surprisingly low (especially compared with the 60-70 range it had been showing recently), as the threat of rising interest rates had investors fleeing. Telecom displays the highest Bear score this week once again, although at 53 it is fairly low, indicating only mild investor interest when the market is weak. Still, on a relative basis, Telecom stocks have been the preferred safe havens on weak market days. Energy continues to display the lowest score, this week falling even further to 35. The top-bottom spread is 18 points, reflecting lower sector correlations on particularly weak market days. Again, it is generally desirable in a healthy market to see low correlations and a top-bottom spread of at least 20 points.

5.  Technology displays the best all-weather combination of Outlook/Bull/Bear scores, followed by Healthcare, while Telecom is clearly the worst. Looking at just the Bull/Bear combination, Healthcare is the clear leader, followed by Consumer Services/Discretionary, indicating superior relative performance (on average) in extreme market conditions (whether bullish or bearish). Energy scores the worst, indicating general investor avoidance during extreme conditions.

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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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