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Weekly Sector Relative Strength
Week Ending 10/24/2008

This week was another rough time for the bulls.  More earnings came out, and forward guidance isn’t all that hot.  The S&P 500 fell 6.8% on the week, and all 31 Sectors that we follow were down.  The selling continues, but with every week this happens, there is one less week of sellers out there.  That may be a bit Pollyanna-ish, but I’m grasping at straws here.  The point of exhaustive selling draws closer.


The Week That Was

Our RSInsight report from this week shows the numbers behind the ugliness.  We see continued relative strength in the defensive names Tobacco, Aerospace/Defense, Drugs, and Utilities.


Figure 1
Weekly Price Percent Change 



The only 2 groups that fell less than the S&P 500 were Tobacco and Aero/Defense.


Take a look at the column labeled “10/17/08”.  This was a short-lived relief rally after 3 straight weeks of selling.  The thing I notice most about this bullish week is that some of the most over-sold groups bounced up the strongest.  Energy (+8.9%), Financial Services (+8.8%), Banking (+6.6%), and Telecommunications (+7.6%) all had mini-rallies. 


These groups may be among the best performers when the market turns, and I’ll be watching for candidates from our low PEG S&P500 stocks list.  Keep in mind that these groups are generally more volatile that the defensive names, but they offer above-average gains in a good market.


The Big Picture

Longer-term, we are still seeing the money movement into less recession-sensitive groups.  Relative to the S&P500, seven groups are outperforming.  Most have been good performers for weeks, but Utilities has entered the list as of this week.  In general, Utilities pay good dividends, and the them lately is dividend stocks.  We’ve talked about this before, and should be no surprise when you consider the return on US Treasuries.


Figure 2
7-Week Smoothed Price Percent Change, vs. S&P500 



Continued weakness can be found in Metals & Mining and Manufacturing.  These are direct victims of the market’s impression of a slowing global economy.  Valuations are quite good in these groups, but they are way out of favor.  I would consider these groups for an oversold trade, but until the market sees better economic conditions, these will be weak.


Industry Performance

Looking at Figure 2 above, we now expose the industries in the top 7 groups.  I configured RSInsight to display the weekly percent change for all the Sectors and Industries in those top seven, then sorted by the current week’s change. 
Figure 3
Industries In Top Sectors, 1 week % change 

Only 13 of the 55 groups outperformed the S&P 500 this week.  This means that although there are 7 long-term out performing sectors, within those sectors there are short-term underperforming industries.  Let’s focus on the top groups.


Tobacco Products, Other

As a group, Tobacco lost less than 1% on the week, vs. -6.8% for the S&P 500.  Philip Morris (PM, forward P/E 12) announced better than expected earnings this week, and the group was supported by their recession-proof business.  As long as defensive stocks remain in favor, I expect this group to outperform.  Other names in the group are US Tobacco (UST, forward P/E 18), and Lorrillard (LO, forward P/E 11.5).



After a rough go of it last week, the rails only fell half of the S&P 500.  Burlington Northern (BNI, forward P/E 12.8) beat earnings on Thursday, a day after Norfolk Southern (NSC, forward P/E 11.7) crushed estimates the day before.  This group has been beaten down pretty hard along with the rest of the commodity story, but the earnings and valuations remain compelling.  I expect this group to outperform in the upcoming market bounce, regardless of economic sentiment.


Medical Practitioners

The only name worth looking at here is Transcend Services, Inc (TRCR, trailing P/E 14).  This company provides patient information management solutions to hospitals and other health care providers.  It is a small-cap company, with a total market cap of only $85 million.  Nonetheless, the chart is compelling:



Figure 4
Transcend Services (TRCR), Daily

Source:  bloomberg
The stock has traded sideways all year, which is amazing considering the 40% drop in the general market.  Also notice the support at the $9 level.  Volume also picks up a little bit at these levels.  For the speculative part of your portfolio, this could easily get back to $14 from it’s current $10/sh.  Use a stop below $9/sh.
The market is deeply over-sold.  That is no secret.  The sectors that are moving down the least are the defensive names.  This will continue to be the case in the longer-term (1-3 months), as long as economic data continue to be recessionary.  Things to watch are the employment reports and the manufacturing indices for clues as to the direction of the economy.
On the flip side, some excellent groups are sold too far down.  Soon, maybe this week, these groups will be bought with a lot of idle cash.  The reason I think this is because there has been some artificial price pressure lately that has nothing to do with fundamentals.  When valuations matter again, the groups discussed above, such as energy, will be short-term winners.