Weekly Sector Relative Strength
Week Ending 10/10/2008
 
Percent Movers
As you've likely heard in other forums, this week was the worst drop in the history of the stock market.  The S&P500 fell over 18% this week, capping of a run of 8 down days in a row.  The Dow, made up of only 30 large cap stocks, also fell 18%, or 1874 points.  This sell off was very broad-based, as we inspect Figure 1 and find that all sectors dropped at least 8% this week  The range is -8% to -23%. 
 
How do we go about finding strength in such a market?  Clearly, there is no abolute strength.  In fact, last week all groups fell at least 3.5%, with a range of -3.5% to -21%.  We might interpret this week, compared to last week, as marginally worse.
 
Figure 1
Weekly Price Percent Change
 
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The best way to sort out all the negatives is to look at Relative Strength.   Given that everything got sold this week, which groups were sold more than others?  Which tended to hold their ground better?  In Figure 2 I show relative percent moves vs. the S&P500.   In this viewing of the data, we see 23 groups that fell less than the market as a whole.  These "strong" groups had a relative performace of 1 to 10 percentage points better than the market.
 
Figure 2
Weekly Price Percent Change, vs. S&P500
 
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Another way I like to twist and turn this data is to see which groups had the biggest Relative Strength change from week to week.  For instance, look at the top group, Real Estate, in Figure 2.  Last week, it performed 6.31 percentage points worse than the market.  However, in the current week, it beat the market by almost 10 points.  That's a significant shift of 16 percentage points over the 2 weeks.  In RSInsight I can easily show this data by clicking the "Diff from Previous?" check box.  Figure 3 shows the current results:
 
Figure 3
Week to Week difference in Sector RS
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Chemicals, Real Estate, and Internet had the largest improvements against the market.  This week, they beat the S&P by 8%, 10%, and 7.5%, respectively.  Let's dig down further into these groups and see where the strength lies.  Figure 4 shows all sub-groups within these 3 sectors.  One-week performance can now be compared among all the industries which make up the 3 sectors.
 
Figure 4
Industries within Top 3 Sectors
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Here we find Agricultural Chemicals and a slew of Real Estate Investment Trusts.  The Ag names used to be hedge fund momentum favorites, and many are down 50-60% from their highs in June.  The fact that they have strong earnings growth may be providing some support, finally.
 
The REITS, on the other hand, are probably relatively strong for different reasons.  A quick check through the stocks in this group shows many dividend-paying names at beaten down prices.
 
Longer Term Trends
Using the long-term settings (7 weeks, 3 day moving average), we can see a few shifts in sector strength. 
 
Figure 5
Long-Term Sector Trends
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Figure 5 shows that the following groups turned positive against the S&P during the week:
  • MG440 Real Estate
  • MG760 Diversified Services
  • MG740 Specialty Retail
  • MG750 Wholesale
  • MG770 Transportation
Both Real Estate and Diversified Services are coming off of multiple underperforming weeks.  Should these groups be bought?  Let's look inside the sectors, much like we did in Figure 4.  The next screen shows all the industries within Real Estate and Diversified Services, for a long-term view inside these sectors.
 
Figure 6
Industries within Real Estate and Div. Svcs
 
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The group that looks like it may be a turnaround candidate is MG761, Business/Management Services.  It has underperformed for four weeks in a row, but beat the S&P500 by 2.65 percentage points this week.  Scanning through the 127 stocks in this broad group, it's hard to see who the strongest technical performers are.  Again, we can drill down into the actual stocks in the group and review performance. 
 
To prepare this list, I removed all stocks in MG761 with a Market Capitalization below $1Bil.  This dropped the list down from 127 to the 24 largest stocks in the group.  I also removed 2 others because they were relatively recent issues, without a long public history of price and fundamentals.  The remaining 22 are shown below:
 
Figure 7
Industries within Real Estate and Div. Svcs
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Using the "2 Color" option in RSInsight, then sorting on today's date, it is easy to see which stocks moved from negative to positive RS against the market.  IRM, HURN, HEW, and TRI all seemed to fare better than the market.  Last week, ICE and ACN went positive, with further strength this week.  Let's look at few names:
 
Iron Mountain (IRM)
IRM provides records and information management services in the US, Canada, Europe, and Latin America.  It has recently fallen slightly below support at 24.50, but not much relative to all other stock getting beaten down right now.  It has steadily growing earning, but currently trades a little rich at 32x trailing 12 month earnings.
 
 
Huron Consulting (HURN)
Huron provides financial and operational consulting services in the following segments:  Health and Education, Financial, Legal, and Corporate. 
 
 
Accenture (ACN)
Accenture provides management and technology consulting services.  Current P/E is 11, with a foward projected P/E of 10, based on estimates.  While ACN's price chart is not especially noteworthy, the chart of it's earnings is quite impressive.  The earnings have grown an average of 18% per year over 5 years.  Going forward, estimates are for 12.3% earnings growth, which gives a PE/Growth ratio of 0.81.  Anything less than 1 usually merits more investigation.
 
Source:  Bloomberg
 
 
Conclusion
This was a dismal week.  The markets still have not begun to trade on fundamentals, so don't put much faith in current stock valuations.  The analysis we did this week shows that some groups are holding up better than others, and some stocks within those groups may be interesting when the market turns around.  Until then, do your homework and be prepared for the flood of money waiting on the sidelines to re-enter this market.
 
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