In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Slowing Drag...
4 Industry Groups Beating the S&P 500
05/17/2012 4:30 pm EST
Relative performance and volume analysis confirms these four industry groups are outperforming the market, writes Tom Aspray, identifying stocks from each that may soon set up as good buys.
The importance of watching for sector rotation was reinforced in 2011 when many of the key sectors saw double-digit gains and losses from one quarter to another. This is reflected on the on the performance table below.
Those who started the year long the energy sector did well, as it was up 16.8% in the first quarter. However, those who held on until the end of the third quarter (and ignored the early-May sell signal) were down 11%. Those who bought and held the Select Sector SPDR - Materials (XLB) ended up losing 12.8% for the year despite a fourth-quarter gain of over 17%.
The only steady performer was the Select Sector SPDR - Utilities (XLU), which had an impressive gain of 14.8%. This performance data needs to be compared to a benchmark like the S&P 500, of course, which was unchanged for the year.
Since the market is currently in a corrective mode, sector or industry group selection is likely to be a very important factor in putting together a buy list for when the current market decline is over.
Even though the Spyder Trust (SPY) is down 6% from its April highs, it is still up 12.2% for the year. This is well below the 21.5% gain in the Select Sector SPDR - Financial (XLF), however, and the 18.5% gain in the Select Sector SPDR - Technology (XLK).
Of course, once the strong sectors have been selected, finding the best industry groups within that sector(s) can give you an added edge. I find that the relative performance, or RS analysis, is the best starting point in this analytical process.
RS analysis compares the performance of a sector, industry group, or stock to a benchmark like the S&P 500. The on-balance volume (OBV) also plays an important role in identifying those industry groups and stocks that are being accumulated.
One industry group that has been a star performer since last October has been the residential construction, or homebuilding group. The SPDR S&P Homebuilders ETF (XHB) is up 24.8% so far in 2012, and some of the individual stocks in the group, like PulteGroup Inc. (PHM), are up over 40%. (For the latest appraisal of the homebuilders, see "New Warning Signs Hit Homebuilders.")
In this article, I will focus on four industry groups that are currently outperforming the S&P 500. For each group, I have also selected a particular stock that is outperforming the market.
Given the stock market's current weak status, I would expect to eventually see a wave of panic selling before the market can bottom out. This should take each these stocks back to more important support levels and create good buying opportunities.
The Select Sector SPDR - Health Care (XLV) has been acting much better than the overall market since the start of April, as it is down just 2.1% versus a 6% drop in the Spyder Trust (SPY). Biotechnology is part of the health care sector, and the iShares Nasdaq Biotechnology Index Fund (IBB) is up over 2% during the same period. Therefore, it has outperformed SPY by 8%.
As seen on the below chart, IBB made new all-time highs last week. There is initial support now at $122.80-$124 with further support in the $119-$120 area. The lows for the last three months are in the $116.40 area, line a. The major support is now at $110, which corresponds to the 2011 highs, line b.
The daily relative performance, or RS analysis, has confirmed the new highs, as it has risen sharply since early April. It is now well above the support at line c. The daily OBV also broke out in April, and while it has dropped below its weighted moving average (WMA), it has good support at line d.
Amgen Inc. (AMGN) is a $55 billon biotechnology company whose shares yield 2%. AMGN represents a 7% holding in IBB. The stock surged to the upside at the end of April after a weekly close above the resistance at line e.
AMGN has minor support now in the $69.50 area with further support at $67.50-$68. The weekly uptrend, line f, is now at $65.70 with key support at the April 16 low of $65.37. The breakout from the major trading range in late 2011 still has upside targets in the $77 area.
The weekly RS line moved sharply above its weighted moving average in April and is acting very strong. It is well above support at line g. The daily RS analysis (not shown) is also positive. Weekly OBV broke out in December and is holding above its weighted moving average. There is long-term support at line h.
How to Profit: For the iShares Nasdaq Biotechnology Index Fund (IBB), go 50% long at $120.14 and 50% long at $117.64 with a stop at $114.82 (risk of approx. 3.4%).
For Amgen Inc. (AMGN), go 50% long at $68.54 and 50% long at $67.12 with a stop at $64.76 (risk of approx. 4.5%).
The Coca-Cola Company (KO) has been one of the largest positions in the "Charts in Play" portfolio over the past few months, and the Dow Jones Soft Drinks Group Index broke out of major resistance, line a, at the end of March. This completed a year-long flag formation that has upside targets in the 450-460 area. This is about 6% above current levels.
There is initial support now in the 405 area and then at 390. The longer-term uptrend, line b, is in the 378 area. The RS line has turned sharply higher and is close to overcoming the highs from late 2011.
The weekly OBV broke out two weeks ahead of prices when it moved through its downtrend, line c, and completed its trading range. It has confirmed the recent highs and is well above its rising weighted moving average.
Pepsico Inc. (PEP) is a $107 billion company whose stock currently yields 3.2%. The stock has popped in the last week, as it has decisively closed above the resistance at line e. There is next resistance at $70.49, which was the high in July 2011. PEP made a high of $71.89 earlier in 2011.
PEP held up much better than many stocks in 2008, peaking at $73.20 in September 2008. It has an all-time high of $79.79. The daily RS line bottomed in March (line g) and has risen very sharply in the past week. The move through the long-term downtrend, line f, is positive.
The daily OBV has overcome strong resistance at line h, and recently, the volume has been very strong. There is first support now at $67-$67.40 with much stronger support in the $65.80-$66.40 area.
How to Profit: For Pepsico Inc. (PEP), go 50% long at $67.34 and 50% long at $66.78 with a stop at $64.46 (risk of approx. 3.8%).
As seen below, the Dow Jones Residential REITs Index broke through major weekly resistance, line a, at the end of March, and has since moved above the 2011 highs. It is up 9.6% from the March lows.
The weekly uptrend, line b, is now at 1366 with the breakout level at 1356. The RS analysis is strong, as it moved through resistance in April and is well above its rising weighted moving average. The weekly OBV has moved above year-long resistance, line d, and shows a bullish pattern.
Camden Property Trust (CPT) is a $5.3 billion residential investment trust that currently yields 3.3%. CPT recently made a high of $69, which was just below the 2011 high of $69.48.
CPT is now close to testing the breakout level at $66.10, line f, with further support in the $64.50-$65 area. The 38.2% Fibonacci retracement support is at $62.50 with the 50% support at $60.50.
The daily RS analysis bottomed in April when the downtrend, line g, was overcome. It is still holding well above its weighted moving average and recently made new highs. The daily OBV turned negative in early May when it dropped below its weighted moving average. The weekly OBV (not shown) looks more positive.
How to Profit: For Camden Property Trust (CPT), go 50% long at $63.66 and 50% long at $62.74 with a stop at $59.82 (risk of approx. 5.3%).
The final industry group I would like to focus on is the Dow Jones Internet Index, which is part of the market-leading technology sector. The daily chart shows that this group has been in a trading range, lines a and b, since last November. Wednesday's close was above the short-term resistance, and a move through the 462 level (line a) has initial Fibonacci targets from the flag formation at 485 with additional targets in the 500-520 area.
The daily RS line has completed its bottom formation and broken through resistance, line c. The daily OBV is acting stronger than prices after moving to new highs in early May and overcoming the downtrend, line e. The weekly OBV (not shown) could likely close above its weighted moving average this week.
Earthlink Inc. (ELNK) is a $900 million provider of network, IT, and communications services. The stock currently yields 2.4%. ELNK closed above nine-month resistance, line f, on May 3, and is up over 5% for the month. There is strong resistance from 2010 and 2011 in the $9.10-$9.35 area.
The RS line has been rising since last November, line h, and the bottom formation was confirmed by the move through the downtrend, line g.
The OBV broke through its downtrend, line i, in January, and was very strong in February. It is now challenging the previous high and is above its rising weighted moving average. Weekly OBV (not shown) is also above its weighted moving average and positive.
There is initial support at $8.15-$8.35 with much stronger support at $7.75-$8.00.
How to Profit: For Earthlink Inc. (ELNK), go 50% long at $8.16 and 50% long at $7.84 with a stop at $7.44 (risk of approx. 7.1%).
The current RS analysis for these four industry groups suggests they are likely to continue outperforming the S&P 500. The stocks that I have chosen from each of these groups also have favorable RS and OBV analysis.
Since the market is clearly in a downtrend, only be looking to buy these stocks on pullbacks towards stronger support where the risk can be well controlled.To learn more about stock and sector selection, also read "5 Steps for Finding the Next Winning Stock."
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