FMX | Connect – www.fmxconnect.com - (Reported 8/3/2010)
Sector Developments
Dan Wantrobski CMT (215) 665 - 4446
Research Analyst Certification and Important Disclosures start at the bottom of this document
We continue to like the broader markets for a rally into mid-August. We are maintaining long positions above the S&P’s rising 50-day moving average- currently near 1082, though more significant technical support resides toward 1050 in our view.
Here are some recent sector developments that we feel will define the current rally in the weeks ahead.
· The retail sector is oversold and still runs a high correlation to crude oil prices. These two factors suggest retail can actually outperform over the short-run, as mean reversion takes place on the relative strength charts and crude prices look set to break above $80 a barrel
· We are moving to a neutral / market-weight in semiconductors and broader tech. Relative strength charts are currently showing weakness against the S&P 500
· We still like energy as an overweight and new emerging leader
· Commodities in general look set to outperform the S&P over the near- to –intermediate-term time horizon
· Check out the broker-dealers: still looks like there is more upside in the mean reversion trade against the S&P
Retail Sector
On a relative strength basis, the retail sector (gauged by the S&P Retail Index) looks oversold against the S&P 500, and thus poised for a ‘mean reversion’ rally over the short-run. This implies outperformance ahead by this recently lagging sector:
Retail vs the SPX: oversold!
Mean reversion on the relative strength charts can lead to profitable trades in our opinion. In the chart above, note how the retail/SPX ratio is stretched below its 50-day moving average while its MACD is positively diverged (higher lows). We believe this argues for some outperformance by the retail sector over the short-run.
We also note that the retail sector retains a generally positive correlation to crude oil prices:
2-Year Chart of oil vs S&P Retail Index:
This is important to watch because crude prices appear to be breaking above $80 resistance this morning:
Crude Oil: breaking above $80 this morning…
Crude prices have been lagging other commodities recently- but this morning, oil prices appear to breaking out of this bullish ascending triangle formation. If correlations between crude prices and the retail sector remain intact, today’s technical development in the commodity should benefit the retail sector over the short-run, in our opinion.
Out of the S&P Retail Sector, over the short-run we like (technically):
ANF
BIG
KMX
EXPE
RSH
TIF
We also still like WMT- though the stock is not included in the S&P Retail Index per Bloomberg as of 08/02/10.
KR appears to be another name that is gearing up for a breakout. It displays a high correlation to various agricultural commodities (such as wheat and soybean prices)- those of which currently are breaking out on the charts:
1-Year chart of KR vs Wheat Prices (wheat shown in orange):
Commodities
Outside of energy/crude, we also like the broader commodity space relative to the S&P right now. Though the CRX Index is heavily influenced by the energy subsector, the ag sector in particular has seen many breakouts over the last few weeks (which we have published on with respect to our DBA trade). Wheat, soybean, sugar, and corn prices have all been surging higher- causing us to ponder whether these are new inflationary pressures mounting, or perhaps the possibility for geopolitical disturbances as a cardinal cross approaches by week’s end.
We focus in particular on corn prices this morning, which are showing signs of a positive basing effort and potential breakout ahead:
Corn: 401
DE typically gets the lion’s share of attention when talking about cyclicals and corn prices. However, take a look at MON vs the spot price:
MON vs Corn Prices: 2008-Present
Except for a brief period during the summer/early autumn of 2009, MON has been tracking closely to corn prices in our opinion. If this correlation remains intact going forward, then the breakout in corn prices noted in the chart above can be beneficial to MON on a trading basis. The daily charts have certainly perked back up recently, and we would stay long the stock at this point above its rising 50-day moving average (red line):
MON: 59.43
Broker-Dealers
Unanticipated strength out of the broker-dealer group has been allowing the broader financial sector to maintain positive relative strength trends against the S&P. Remember, financials are one of the best gauges of underlying market health: when we see rallies / cyclical uptrends without the participation or leadership from this key sector, it suggests the breadth is not supportive of the move- and more likely, sector rotation is taking place underneath the surface which can lead to a topping / distribution phase.
XBD Index vs the SPX:
On a short-term daily RS chart, we can see that the XBD index was one of the recent relative strength leaders. This strength has allowed the XBD/SPX ratio to push back above its declining 50-day moving average for the first time since early 2009. We also note that the MACD indictaor (bottom portion of chart) recently broke back above the zero line and into positive territory. This ‘breakout’ in the indicator is a positive technical development in our opinion, and may lead to further upside (in terms of relative performance) over the next few weeks.
Out of this financial sub-sector, we like:
AMP
ETFC
GS
MS
Dan Wantrobski, CMT
Janney Montgomery Scott LLC
Director | Technical Research
1801 Market Street | Philadelphia | PA 19103
O: 215.665.4446 | M: 215.495.3738
Technical opinions expressed in this report are not dependent upon the opinion of the fundamental analyst covering any security. Accordingly, the Technical opinions contained herein may differ from those of the fundamental analysts. Copies of the Fundamental Analysis reports are available upon request. All charts courtesy of TradeStation and or Bloomberg.
ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES
Research Analyst Certification
I, Dan Wantrobski, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this research report.
Janney Montgomery Scott LLC (“JMS”) Equity Research Disclosure Legend
1. JMS is a market maker in the securities of the company and may at any time hold a long or short position in this security.
2. The research analyst primarily responsible for preparing this research report or a member of the research analyst’s household has a financial interest in the securities of the company in the form of a long position in such securities.
3. The research analyst primarily responsible for preparing this research report or a member of the research analyst’s household has a financial interest in the securities of the company in the form of options (O), warrants (W), futures (F), and/or a short position (S).
4. JMS or an affiliate managed or co-managed a public offering of securities for the company in the past 12 months.
5. JMS or an affiliate received compensation for investment banking services from the company in the past 12 months.
6. JMS or an affiliate received compensation for products or services other than investment banking services from the company in the past 12 months.
7. JMS may seek compensation for investment banking services from the subject company (ies) in the next 3 months.
8. The research analyst is compensated based on, in part, JMS’s profitability, which includes its investment banking revenues.
9. JMS or an affiliate beneficially owns 1% or more of any class of common equity securities of the company.
10. An Employee or Director of JMS is an officer or Director of subject company.
11. Other:
Definition of Ratings
BUY: Janney expects that the subject company will appreciate in value. Additionally, we expect that the subject company will
outperform comparable companies within its sector.
NEUTRAL: Janney believes that the subject company is fairly valued and will perform in line with comparable companies
within its sector. Investors may add to current positions on short-term weakness and sell on strength as the valuations or
fundamentals become more or less attractive.
SELL: Janney expects that the subject company will likely decline in value and will underperform comparable companies
within its sector.
Ratings Distribution 06/30/10
Janney Montgomery Scott Ratings Distribution* as of 06/30/10
BUY NEUTRAL SELL
53% 45% 2%
*As a percent of total coverage. See ratings definition above.
Janney Montgomery Scott Ratings of Investment Banking Relationships* as of 06/30/10
BUY NEUTRAL SELL
10% 3% 29%
*Percentages of each rating category where Janney has performed Investment Banking services over the past 12 months.
Other Disclosures
Investment opinions are based on each stock’s 6-12 month return potential. Our ratings are not based on formal price targets, however our analysts will discuss fair value and/or target price ranges in research reports. Decisions to buy or sell a stock should be based on the investor’s investment objectives and risk tolerance and should not rely solely on the rating. Investors should read carefully the entire research report, which provides a more complete discussion of the analyst’s views.
This research report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Supporting information related to the recommendation, if any, made in the research report is available upon request.
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Source: Chartbook
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