Sector Detector: Bulls Plot Attack On 2012 Highs
Scott Martindale | Jan 10, 2013 02:10PM ET
Another earnings season is underway. I haven’t noticed much in the way of pre-announcements (i.e., warnings), which is a positive sign. However, the big banks continue to consolidate and “rationalize” their cost structure in the wake of the post-2008 crisis and the resulting new regulations, with Morgan Stanley on Wednesday announcing layoffs of some 6% of its workforce, primarily in sales, trading and investment banking roles, plus some IT support. But this is mostly impacting the big banks alone, while much of the rest of the Financial sector looks strong and poised to lead the markets this year. Overall, the markets sure look positive.
Despite the brief stock rally in the wake of the fiscal cliff resolution, investors are now wary of the intractable problems that remain -- particularly the looming debt ceiling and runaway spending. But the bulls are pushing ahead -- consolidating their recent gains -- and appear to be plotting an attack on the 2012 highs.
On that bullish note, Sabrient “Baker’s Dozen” Top Stocks list for 2013 will be released on January 11 in conjunction with a Unit Investment Trust for the same 13 high-potential (and reasonably priced) stocks. Last year’s model portfolio gained an astounding +43%. You can learn more REGN ).
Disclosure: Author has no positions in stocks or ETFs mentioned.
About SectorCast: Rankings are based on Sabrient’s SectorCast model, which builds a composite profile of each equity ETF based on bottom-up aggregate scoring of the constituent stocks. The Outlook Score employs a fundamentals-based multi-factor approach considering forward valuation, earnings growth prospects, Wall Street analysts’ consensus revisions, accounting practices, and various return ratios. It has tested to be highly predictive for identifying the best (most undervalued) and worst (most overvalued) sectors, with a 1-3 month forward look.
Bull Score and Bear Score are based on the price behavior of the underlying stocks on particularly strong and weak days during the prior 40 market days. They reflect investor sentiment toward the stocks (on a relative basis) as either aggressive plays or safe havens. So, a high Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods.
Thus, ETFs with high Bull scores generally perform better when the market is hot, ETFs with high Bear scores generally perform better when the market is weak, and ETFs with high Outlook scores generally perform well over time in various market conditions.
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Of course, each ETF has a unique set of constituent stocks, so the sectors represented will score differently depending upon which set of ETFs is used. For Sector Detector, I use ten iShares ETFs representing the major U.S. business sectors.
About Trading Strategies: There are various ways to trade these rankings. First, you might run a sector rotation strategy in which you buy long the top 2-4 ETFs from SectorCast-ETF, rebalancing either on a fixed schedule (e.g., monthly or quarterly) or when the rankings change significantly. Another alternative is to enhance a position in the SPDR Trust exchange-traded fund (SPY) depending upon your market bias. If you are bullish on the broad market, you can go long the SPY and enhance it with additional long positions in the top-ranked sector ETFs. Conversely, if you are bearish and short (or buy puts on) the SPY, you could also consider shorting the two lowest-ranked sector ETFs to enhance your short bias.
However, if you prefer not to bet on market direction, you could try a market-neutral, long/short trade—that is, go long (or buy call options on) the top-ranked ETFs and short (or buy put options on) the lowest-ranked ETFs. And here’s a more aggressive strategy to consider: You might trade some of the highest and lowest ranked stocks from within those top and bottom-ranked ETFs.
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