TD Trader- With permission from the author I'm posting Arthur Hill's most recent commentary. Subscription service. $59 for 6 months. Not much for individual picks but he helps me determine market direction. Home Site:http://www.tdtrader.com/index.html
Tuesday 19-Feb-02 11:00AM New York / 4:00PM London
***General Comments***
I am going to divide this week’s sector/industry overview into two parts. Today I will look at the sector rotation. Tomorrow I will look at the value versus growth within large, mid and small-cap stocks. Later this week, I will add these comparative charts to the market charts page and they will be updated daily.
This week’s commentary schedule will be as follows (all time eastern):
-Tues-Wed 7AM: Short/Medium-Term Market Analysis with candlestick charts
-Tuesday 12PM: Sector/Industry Overview - rotation
-Wednesday 12PM: Sector/Industry Overview – growth vs. value
-Thursday 7AM: Short/Medium-Term Market Analysis with PnF charts
-Thursday 12PM: Stock Picks and Pans
-Friday 7AM: Condensed Short/Medium-Term Market Analysis
-Friday 12PM: Long-term Market Analysis and Review
***Sector Overview***
The two charts below show the price relative for 12 sectors against the Wilshire 5000. The economic cycle is divided into 6 sections- early, middle and late contraction or expansion. I tried to use tradable instruments such as HOLDRS and SPDRs, but had to resort to the Dow Transports ($TRAN) for transports. In addition, the Pharma HOLDRS (PPH) is used to represent the healthcare sector and the Basic Industry SPDR (XLB) is used to represent basic materials. These are not perfect fits, but capture the core of these sectors. The analysis below pertains to the price relative and further due-diligence is required on the individual price charts.
Just as reflected by the economy, the analyst community, the price action of the Dow and the mixed technical signals, the sector rotation chart does not present a clear picture of where we are in the economic cycle. The cycle is not dead as we know it, just a little confused and still rebalancing from the excesses of the late 90s. At this time, an inordinate amount of money flowed out everything and into tech stocks. Now that techs are correcting, money is moving back into other groups and portfolio managers are rebalancing.
In 2000, the beneficiaries of tech/telecom weakness were consumer services, consumer staples, energy, finance, industrials, pharma and utilities. Seven of the twelve sectors were clear beneficiaries. It was not until 3Q00 that cyclicals and transports got into the act. In 2001, the picture began to muddle. Cyclicals and finance led the way and outperformed most of the year. Tech, telecom and utilities were weak. Late in year, transports, consumer services and cyclicals performed exceptionally well. On note, financials were quite weak in 4Q01.
In the first few weeks of 2002, the picture is as follows:
Strong: Transports, consumer services, consumer staples, cyclicals and pharma.
Weak: Industrials, tech, telecom.
Undecided: Energy, financials and utilities.
Of the 12 price relative charts, 4 sectors have caught my eye: consumer staples, pharmaceuticals, financials and technology.
First, pharmaceuticals and consumer staples are starting to show strength and signs of a potential upturn. After outperforming from July to September, these two groups took a hit when the market roared back to life in 4Q01. Both groups underperformed from September to early January, but have started outperforming since mid January. The price relatives for both retraced about 62% of their prior advance and appear to have turned the corner. Notice the trendline break and higher high for consumer staples. Pharma have broken the trendline, but remain short of a higher high and breakout. There is some overlap in these groups with big pharmaceuticals in both groups. However, the movement of money into staples and pharma shows a defensive market.
In contrast, money is moving out of financials and technology. The price relative for technology formed a lower high around 9-Jan and moved below its prior low to establish a downtrend. This downtrend actually represents a continuation of the long-term decline. With the exception of industrials and telecom, tech stocks are the weakest link. Financials benefited from the prospects of lower rates and were one of the top performers as of early Oct-01. However, this group has seriously underperformed since early October and the price relative moved to its lowest level since Jun-01. There was a sharp move higher in late January, but this was followed by a lower low. Since Jul-01, the price relative shows lower lows and this group, which is dominated by big money center banks, remains out of favor.
Based on the price relatives, the two groups to consider (long) are consumer staples and pharma, while the two groups to avoid (short) are tech and financial. It is still a bit early for pharma and I would wait for further proof of a reversal. Cyclicals and basic industry remain the top performers overall with their price relatives at new 52-week highs, while telecoms are at a 52-week low. All three of these groups have been trending for well over a year and could be in the latter phases of their moves. Energy and utilities look tempting from a price relative standpoint, but have yet to fully turn. Potential bases are being built, but both remain short of actual breakouts. Transports, perhaps the strongest single group since November, remain strong, but the rate of ascent is a bit scary and I believe the group has become overbought.
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