Tag Archives: economy

Korean ETF Offers Investors Chance For Growth

EWY is weighted heavily towards the information technology and consumer discretionary sectors. Korea is a technology-based economy composing of companies who are industry leaders in their respective fields and have strong earnings. EWY provides targeted access to Korean stocks and is a good measure of the economic strength of Korea; rating agencies are optimistic in growth prospects of Korean economy. By Harry Lee Korea is currently offering investors a solid mid-term growth opportunity at a good value through the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ). EWY is down 16% overall from its high at 62.93 in April, due to a strong U.S. Dollar, the devaluation of the Chinese yuan, and the crash in equity prices in China this past summer. Fundamentally, however, the Korean economy itself not remarkably declined in a way that justifies the 16% decline in EWY’s price since July of 2014. This has created a solid entry point for investors looking for strong growth potential over the mid term. EWY’s Sector Weights and Sector-Specific Performance EWY is heavily weighted towards the information technology and consumer discretionary sectors. Hence, when evaluating EWY, we must examine the individual performances of those individual sectors and their long-term growth prospects, rather than solely scrutinizing at the performance of the national economy as a whole. Samsung Electronics ( OTC:SSNLF ) is the largest component, at 21.99%; Hyundai Motors ( OTC:HYMPY ), Naver Corp. ( OTC:NHNCF ), and others trail between 2~3%. In its most recent earnings report, Samsung posted quarterly revenue of $45 billion, up 8.9% year-over-year. Profits were $6.45 billion, up an astonishing 82%. Despite mounting pressure from competitors such as Apple and Huawei on both the high and low-ends, respectively, Samsung’s profits expect to be relatively protected due to its semiconductor business. Samsung’s semiconductor business supplies Apple (NASDAQ: AAPL ) with the A9 chip processor used in Apple’s flagship iPhone 6 and iPhone 6S models. Hyundai Motors is also expected to have good growth prospects. Despite posting record low profits in Q3 of 2015, they recently announced that they would launch a new global luxury car brand called Genesis, targeting large fat profit margins from the higher end of the market. Building off of its current luxury models, the Genesis line will launch with two luxury sedans aiming to combat both the European luxury brands of BMW ( OTCPK:BAMXY ), Mercedes-Benz, and Audi ( OTCPK:AUDVF ), but also Nissan’s ( OTCPK:NSANY ) Infiniti and Toyota’s (NYSE: TM ) Lexus. Investors reacted positively to the news, with Hyundai shares closing 1.85 percent higher at a one-month peak. Considering all these factors, the prospects for growth in the mid-term are quite optimistic. Performance of the South Korean Economy as a Whole Investing in an ETF that closely tracks the performance of the Korean economy is a solid investment because South Korea has a number of economic advantages, including a highly advanced economy (nominal GDP is ranked at 13th highest); a low debt-to-GDP ratio and an accommodative central bank. Recently, the Bank of Korea maintained interest rates at 1.5 percent, but drastically cut the benchmark borrowing costs in half over the past three years in an attempt to defend domestic exporters against the Chinese exporters in a climate of a devalued Chinese yuan. Moreover, Standard & Poor’s upgraded Korea’s credit rating to AA- this past September, the highest rating in nearly two decades. It expressed optimism in the growth prospects of the peninsula, claiming that it was likely to maintain economic growth higher than the bulk of the developed economies in the next three to five years. S&P also expressed optimism at the overall decline in external debt owed by Korean banks and reduced short-term borrowing in total external debt. Conclusion Korea’s world-leading electronics industry, along with optimism in the auto industry appears encouraging for the information technology and consumer discretionary sectors within Korea, both of which are significant components in EWY. A vigorous but an accommodating central bank that is willing to devalue its currency to defend domestic producers and exporters should prove encouraging for the mid-long term growth prospects of the economy as a whole. Despite these positive facets, an investment in EWY is not entirely risk free. Samsung Electronics’ flagship mobile division could underperform, leading to the firm missing analysts’ expectations and driving both the equities of the firm and EWY down; Hyundai’s new luxury brand may not become a cornerstone of automotive luxury as Lexus and Infiniti have become. In conclusion, though, there are many factors that point to an optimistic long-term future for Korea, though it is not without risk. The current pricing appears to be a good point of entry, as a series of recent global circumstances have depressed EWY below its true value. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Why Stocks Are Getting Riskier By The Day

Borrowing costs are set to move higher. Higher borrowing costs could force American companies to curtail the debt that they’ve raised to buy back shares of their own stock. Not only would stock prices struggle to move higher if corporations are not buyers of as many shares as they have been in the past, but a lessening in stock buybacks would reduce the perception of corporate profitability. These headwinds to stock valuations as well as future returns – near-term and longer-term – are not easily dismissed. The central bank of the United States (a.k.a. the Federal Reserve) may hike its overnight lending rate in December. Committee members are also discussing plans to phase out the reinvestment of principal on balance sheet securities. Translation? Borrowing costs are set to move higher. The Fed is tightening for the first time in nearly a decade. In so doing, it is implicitly signaling faith in the U.S. economy’s ability to accelerate. The question investors might want to ask is whether or not that conviction is misplaced. For one thing, if the U.S. economy continues to expand at the same sub-par recovery rate of 2.2% per year, stock valuations will move from overvalued to insanely valued. Consider the ratio of total U.S. stock market capitalization to the broadest quantitative measure of U.S. economic activity, gross domestic product (GDP). With total market cap at nearly $21.6 trillion and GDP at at roughly $17.9 trillion, the ratio sits at 120.8%. The historical average since 1970? About 72.5%. Investors should recollect that Warren Buffett described Market-Cap-To-GDP as the “best single measure of where valuations stand at any given moment.” It follows that stocks are more expensive than they were before the financial collapse in 2008, though they are less expensive than they were prior to the tech wreck in 2000. If the ratio reverts to the historical mean of 72.5%? Then hold-n-hope advocates should prepare themselves for stock prices lose HALF of their current value. There are other concerns for investors should the economy prove less resilient than the Federal Reserve would like us to believe. Higher borrowing costs could force American companies to curtail the debt that they’ve raised to buy back shares of their own stock. Why is this so problematic? Not only would stock prices struggle to move higher if corporations are not buyers of as many shares as they have been in the past, but a lessening in stock buybacks would reduce the perception of corporate profitability. Remember, when a public corporation earning $0.70 per share (EPS) has one million shares outstanding, lowering the share count by 10% to 900,000 artificially pushes profitability per share up to $0.778. Were any additional products or services sold? Nope. The accounting wizardly plays itself out in more “reasonable” price-to-earnings (P/E) ratios that investors often use to determine valuation levels. Keep in mind, the buyback game has been happening for more than six-and-a-half years. Since 2009, debt-fueled share buybacks pushed earnings per share up 190%. Revenue from sales of products and services? Sales have increased an exceptionally modest 23%. With buybacks primarily funded by debt, higher borrowing costs sank the debt-funded buyback connection that was part and parcel of the previous market collapse (10/2007-3/2009). Is it unreasonable to suspect that this connection will follow a similar pattern? (click to enlarge) So if the Fed is wrong about the growth of GDP, and if it is wrong about the effect that higher borrowing costs will have on corporate credit expansion, stock valuations will surge. That’s true for Market-Cap-To-GDP. And that’s true for price-to-earnings (P/E). Yet there may also be an issue with the perception of a directional shift from a stimulative environment to a less stimulative one. Take a look at the relationship between the S&P 500 and the Fed’s balance sheet throughout the current bull market run. Each time that the Fed created electronic dollar credits to buy assets, expanded its balance sheet, and subsequently lowered borrowing costs, stocks rallied dramatically. In each of the three instances since the 2009 stock lows where the balance sheet remained the same? Stocks struggled to make meaningful strides. (click to enlarge) The possibility of the Fed reducing its balancing sheet. The danger of share buybacks rolling over. The unlikelihood of the U.S. economy breaking out in dramatic fashion. These headwinds to stock valuations as well as future returns – near-term and longer-term – are not easily dismissed. And that’s not even addressing the possibility that the domestic economy and/or the global economy weaken further. Is the consumer truly in great shape? Retail stocks in the SPDR S&P Retail ETF (NYSEARCA: XRT ) suggest otherwise. The exchange-traded fund hit new 52-week lows below the levels that we witnessed in the August-September sell-off. What’s more, we already know the recessionary struggles associated with manufacturers. Industrial production, which measures the amount of output from the manufacturing, mining, electric and gas industries, has fallen in nine of of the previous 10 months. There are few, if any, ways to put a positive spin on the declines in industrial production. (click to enlarge) And then we have the Fed telling us that “global market risks have diminished.” Really? How much further does copper – the metal with a Ph.D. in economics – need to fall before global market risks reignite? The iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSEARCA: JJC ) has not only broken below August and September lows, it might as well have fallen off a cliff. Similarly, how much further does oil need to drop before oil producing exporters begin falling apart. The iShares MSCI Canada ETF (NYSEARCA: EWC ) is still toiling near its 52-week depths. No Virginia, global market risks have not diminished. For that matter, global economic deceleration is still the prevailing prognostication by the International Monetary Fund (NYSE: IMF ). China’s economic output is decelerating. Japan is already in recession. And European quantitative easing is not stimulating borrowing activity the way that it did in the U.S. In the end, all we have is the collective hope of voting members in the Federal Open Market Committee (FOMC). Hope that economic improvement will overcome lofty valuations and a pullback in corporate borrowing. Don’t get me wrong. Based on everything from “tax-loss harvesting” to “window dressing” to momentum investing, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) may still represent the best diversified stock holding around. How long one should stick with those brass tacks, however, is another matter entirely. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Sector Rotation Watch: The Economy And Earnings

Summary The economy remains resilient. Earnings have been decent, specifically against lowered expectations, but profit margins are near peaks and are flattening at best. Sector rotation characteristics are generally bullish but have been exhibiting a lot of back and forth action the last few months, indicating an ongoing bull/bear fight. Sector and Stock Market Background (primarily for new readers) If you’ve read me before and understand the “primers” and Sector Rotation Theory/Model, you can skip to the next section (Current Market). If you are a new reader, Chart 0 below shows the sector rotation principle. For a quick read on understanding of the principle and causes of sector rotation, please see the “Sector Rotation Background” in this article (at the very top), but I would recommend you skip it and go straight to the more comprehensive “must read” article on sector rotation in a bear market , which was my first published article. It is a “primer” article to understand the principals, and realities, of sector rotation as well as aspects of “behavioral finance” and long -term stock market behavior. I also have two other “primer” articles you should read, one on ” secular equity markets ” to understand long cycles in the market, and one discussing the importance of secular interest cycles and their effect on the stock market. Being “primer” articles, these articles are long; investing is a marathon, not a sprint, it takes preparation. The secular equity markets and interest cycles article are basics everyone must understand. Sector rotation is a more advanced topic. Chart 0 – Understanding the Sector Rotation Model The “sector rotation in a bear market” was my first published article, written in response to another Seeking Alpha article, and it received the most readers because it was an Editors Choice. I wrote the “secular equity markets” to build on some points I touched on in my first article but deserved greater explanation. Finally I wrote the “secular interest cycles” to wrap it all up, to fill in the final piece of the puzzle. However, the order in which I wrote them is essentially backwards. The big picture starts with how secular interest rate cycles affect equity markets, then how equity markets experience long bull and bear periods in a large part due to the interest rate cycles. Once you understand these basics, then understanding sector performance can give clues to where the stock market is headed. Current Market Performance and Some Economic Stats I’ve been calling the market schizo because one day good news is good news (earnings, mostly), the next day, bad news is good news (the Central Banks of the world, either pursuing or talking about further easing, presumably due to slower than desired economies – which are slowing further? – with the possible exception of our FED, which is on the cusp of insignificance because it has continually been “all talk, no action”). With earnings season winding down, the market is now back in a “bad news phase.” I have cleaned up the chart below, but the W and now down has followed this basic reasoning: (1) Down in Mid-AUG: China is slowing = panic; (2) “Up” until mid-Aug: there was actually a big swift bounce once the panic was over, but then China’s PMI hit a six-year low and we fell back, only to slowly rally (mostly) until the FED announcement on Sept.17th; (3) Down until Oct: fairly hard drop after the FED did not raise rates; (4) Up until recently: The SPY sort-of made a double bottom, ignoring “crash Monday’s” long tail, then popped up for 2 days, but the very poor employment number on Oct. 2nd first tanked the market but then it soared intraday and never looked back; EC bankers made easing noises a couple of times, and China cut interest rates and reserve requirements, further boosting the market; (5) Recent turn down: While earnings had been helping, the big drop appears to have mostly been attributable to weak retailer earnings and sales. Chart 1 – Main Index ETFs: DIA , [ SPY , [ IWM , QQQ (click to enlarge) Note on chart enlargement: Right-clicking and selecting “open in new window” (or tab) seems to “right-size” all charts plus you can use “cntl+” and “cntl-” to zoom in and out and move around. This works for the 3 main browsers, whereas simply clicking to enlarge may have issues — i.e., I find the chart slightly too large but I can not move it around. Truly, the best explanation of the pullback that I can find is that sophisticated funds started going long as the VIX approached lows: During the month of October, the gamma exposure of put options declined significantly (and gamma of call options increased), such that the net effect of option hedging has been muted… “Option hedging being muted” means it is not working as well, so buying puts is not protecting your portfolio as well as it use to do. During the panic and “crash Monday”, the Vix soared as did the put/call ratio as investors sought to hedge with puts or outright bet on a declining market. The reason I think this is a better explanation is that it was said on Thursday November 5th, or in other words, it was said with foresight; the strategist in the article apparently has great foresight. Besides, all indications at this point are say there was a short-term panic and as it subsided, people sought to “buy the dip” (‘BTFD’ in less polite terms). The real slide seemed to start on Monday, November 9th,, and you can pick your poison when trying to explain the causes of market moves, but when a reuters story postulates that the ECB is going to go “further into the red,” pushing interest rates deeper into negative territory (ZIRP becomes NIRP becomes even greater NIRP), this is very negative news to me. It trumps all others. Here is some of the other news Good news: Jobs have been growing (there’s a “but” and it is the growth came from the over 55 age bracket and the core brackets are actually losing jobs); however, jobs is a lagging indicator. Housing is also strong , notably in terms of recent employment gains and prices, but in terms of actual sales and starts, the strength is in comparison to the lows reached in the financial crisis and “not so much” in comparison to pre-financial crisis levels. And US auto sales are around record levels. Here’s the bad: Manufacturing is weak and often leads the economy into recession , and is reflected in slowing transportation indices (Chart 2), which is perhaps being driven by slowing imports and exports, especially among commodities (Chart 3). While the data lags by several months, changes in private debt leads or coincides with changes in GDP , and the latest info through June shows debt growth deceleration. Chart 2 – RR Carload and Intermodal Traffic and Cass Freight Index (click to enlarge) Chart 3 – GDP, Imports and Exports (click to enlarge) Remember “math”: the large percentage declines of the financial crisis make for easy comparisons, so the 2010 GDP and import/export increases are not too impressive against easy comparisons; however, 2011 strength was solid and looks fairly strong in comparison (ie, building on improved results). Perhaps the 2012 weakness was difficult comparisons, but for the last 18 months it looks like imports and exports have been getting weaker. Chart 3A below is not meant to be a very readable image. Rather, it has a single point which is fairly simple. Assuming that stock markets are a reliable economic indicator, among the emerging countries of the world, on the right, not a single market has a positive return over the last 12 months (the big black horizontal line is the zero return line). Among the developed world, on the left, only a few are positive, with “the flying PIIG” of Ireland being the strongest. I would be remiss as an Austrian if I did not point out that Ireland has taken a different path in this world of QE and that path has been one of austerity. The developed markets near the bottom of the list are all commodity related. So if stock markets lead the economy, indications are negative. Chart 3A – Developed and Emerging Stock Markets (click to enlarge) Justification for US economic strength has been the consumer, and in particular, motor vehicles have been especially strong (see chart 4 below). Retail sales excluding autos are getting weaker, as has been evident not only in the recent retails sales number disappointment but also in the disappointing earnings of some retailers. Excluding food services sales in Chart 4 and retailer sales are almost flat (American dollars spent eating out have recently surprised dollars spent in grocery sales, which may explain both where fuel savings have gone as well as why employment in restaurants remains strong). Chart 4 – Retail Sales. (click to enlarge) The Atlanta Fed’s GDPnow forecast for the 4th quarter GDP exploded from 1.9% to 2.9% after the strong employment number but has dropped quickly back to 2.3%. This model is new so it needs more time for validation, but its 2nd quarter estimate was a good one and it gained notoriety for its 1st quarter prediction, which handily beat the far too optimistic estimates of Wall Street. Overall the American economy is still moving forward. Earnings and Sector Performance Around 92% of companies in the S&P500 have reported earnings for the third quarter. Around 70% have beaten estimates (Factset: 74%, S&P Dow Jones Indices: 68.5%) and both services project 4th quarter declines as well. Factset currently projects a 1.8% decline in Q3 earnings on a revenue decline of about 4% (S&P Dow Jones Indices releases a spreadsheet with limited commentary, and with different adjustment methodologies, for specific commentary I will rely on Factset unless otherwise noted). Chart 5 – Factset’s Projected 12 Month Forward EPS and the S&P500 Price (click to enlarge) Click here to receive this report via e-mail. The chart 6 below shows the change in the forward 12-month EPS for each sector compared to the price change since June 30th. I find this diagram interesting although I would not yet describe it as helpful because there has been noticeable movement in relative positions in just 1 week (and the colors are Factsets, not my usual). With that caveat, Energy (NYSEARCA: XLE ), in purple, and Materials (NYSEARCA: XLB ), in Tan/Goldenrod, have experienced the largest decreases in EPS estimates (around -5.0%) while at the same time experiencing the largest prices increase since June 30th (~8-10%), likely due to beating analysts depressed estimates. Technology (NYSEARCA: XLK ), in gray, has moved into a tie for 1st place in terms of performance, but the projected change in EPS estimates has dropped from about 2.5% last week to flat. The Consumer Discretionary sector (NYSEARCA: XLY ) has seen its EPS estimate move up since last week, so perhaps will shake offits recent sluggishness and resume its leadership role. Chart 6 – FactSet Price versus EPS changes (click to enlarge) Chart 7 below shows the actual EPS per share for each sector, broken into cyclical and non-cyclical sectors to try to make the charts more readable; however, the bottom section has Excel-determined trend lines to help understand the trend directions. Please note the SPY is on the right-hand-side and the scale seems deceptive, although the large losses in several sectors during the financial crisis may explain the large slope. Looking at a percentage change chart for the last 7 years (not shown, and excluding 2008 which is in the chart below), the best performing sectors were: Discretionary around 280%, Health Care (NYSEARCA: XLV ) and Technology , both around 180%, or roughly what is shown by the better EPS trend lines in Chart 7. Two of these three are cyclical sectors, and Health Care appears to be playing catch-up after an Obamacare-depressed period. Finance (NYSEARCA: XLF ) also appears to have a strong trend based on the depths of its earnings depression during the finance crisis, and as you can tell below, XLF is the 3rd best sector on a 3 year percentage change chart. Chart 7 – S&P Dow Jones Indices Sector EPS (click to enlarge) Note: The HTTP references to source material from S&P Dow Jones Indices/SPDJI refers to the S&P Index page where the data file link under “Additional Info” – “Index Earnings” will start a direct download of the SPDJI EPS data spreadsheet. Generally speaking, the market continues to have a bullish undertone with respect to earnings announcements, as earnings beats have seen around a 2% increase in stock price centered +/- 2 days around the release date versus a 5 year historical average of around a 1% increase in the stock price. Conversely, negative surprises have resulted in about a 2% decline, or about 30 basis points less than average. Good news is good news, and bad news is not so bad, for earnings announcements. Chart 8 below shows the specific sector beats for the 3rd quarter (tan in color) versus the 14 quarter average (black), with beats that exceed the average in green and misses (compared to the average) in red. Generally speaking, the longer-term trend in earnings often determines the ultimate stock price direction (in the long term), although short-term beats and misses determine the more immediate short-term direction, as we have witnessed in the Energy and Basic Materials sectors, which have poor longer-term earnings trends but reacted very positively over the last few weeks as earnings generally exceeded expectations. I have read that academics studies investigating the 1-month price momentum phenomena (persistence of outperformance) speculate it is due to the markets lack of emphasis on quarterly earnings performance (but I have not yet had time to read the research). Regardless, don’t underestimate the importance of quarterly earnings cycles. Chart 8 – SPDJI S&P 500 EPS Beats and Misses by Sector (click to enlarge) Note: If it’s a miss (red), it’s to the right of the tan/black histograms; beats (green) appear to the left. The average beat rate is a simple 14 quarter trailing average without any seasonality adjustment. It is important to understand that a significant factor in EPS growth continues to be the level of stock buybacks. SP Dow Jones Indices cites 68% of the S&P500 companies (312 of 458) as having fewer shares outstanding this quarter when compared to a year ago. Fully 22% have a reduction of 4% or more, for the 7th quarter in a row. A Reuters study shows that many companies are investing more in share buybacks than in R&D and other capital spending. This would certainly explain the sluggish growth in employment, where buybacks do little or nothing for job growth whereas capital investment has been shown to help generate jobs. Almost 60% of 3,297 public non-financial companies bought back shares since 2010 and in 2014 spending on buybacks and dividends exceeded net income for the first time outside of a recession. As I read this article I could not help but think how much we need Washington to incentivize R&D and capital investment through the tax laws, and I laughed when I saw that Senator Warren wants the SEC to look at buybacks as a potential form of market manipulation, but I was pleasantly surprised to see that Hillary wants companies to shift their focus to the long term. So do I, I just wish Washington and the FED understood that “there is no long term” when interest rates are near zero, not in terms of returns on capital and “Buzz Lightyear” payback periods (“To infinity… and beyond!”). Chart 9 – Net Margins (click to enlarge) In addition to the boost to earnings from buybacks, the lack of R&D and capital spending (and lack of new hires?), also contributes to better margins, as shown in Charts 9 and 10 above and below. Longer-term views of margins have them at or near all-time highs, with much speculation as to when they decline. Energy and Basic Materials margins have already begun to decline but other sector margins look healthy. The Tech sector is showing a sharp rebound; the information I have shows Apple (NASDAQ: AAPL ) profit margins looking stable over the last few years, but with all “the negative attribution” of Energy on S&P 500 profits in the last few weeks, I would love to know how Apple plays into the profitability of Tech; you’ve probably seen the case made where removing Apple’s profit from the Tech sector significantly reduces the sector’s profitability. Health Care’s slightly declining operating margins appear counter intuitive and need further explaining although at this point I don’t have an explanation. The Financial sector, like TECH, had to be put on the right-hand-side of the charts below because their margins are significantly higher than the other sectors. This would seem to imply better stock performance for the Financial sector going forward. Chart 10 – S&P Dow Jones Indices – Operating Margins by Sector (click to enlarge) Finally, before moving to the sector percentage change charts, below in Chart 11, I have the PE-to-Growth ratios for each sector, on the left. The right side shows what the actual operating PE is along with the projected growth in EPS. The lower the PEG ratio, the better valuation there is in the sector. This translates to the right side as “the higher the green (growth) relative to the purple (NYSE: PE ), the better”. The highest projected growth (green) is for the Discretionary sector, and it is about equal to the operating PE (purple), and this means the PEG ratio is the lowest one, around 1 (and it is in the sector colors I use, where cyan/blue is the XLY color). Generally speaking, this implies the Discretionary sector has the best valuation on a PEG ratio basis; however, it would be preferable to weigh the XLY sector PEG ratio against its own historical range (I don’t have enough data yet). This principal is perhaps most evident in Utilities (NYSEARCA: XLU ), which can almost always be expected to have the lowest growth rate, making the XLU PEG ratio look unattractive; however, you have to remember that there are at least two other attractions to the Utility sector: (1) higher dividend yield and (2) greater stability (it is almost certain that you need utilities even in a recession). Aside from this caveat, be aware the Energy PEG ratio is meaningless with significantly depressed/negative operating earnings and a low growth rate. The Tech sector and Health Care sector appear to have the next best EPS growth rates, although you will pay a little more for them. Chart 11 – PE-to-Growth (NYSE: PEG ) Ratios for Each Sector (click to enlarge) Overall, earnings have generally been good and even better than expected where they have been weak (XLE, XLB). On a PEG to growth rate, valuations seem attractive. Initially earnings seemed to be helping the market rally, but as earnings season comes to a close, the market reversed back down as I discussed earlier. And as I write this Monday night, after the markets surged today – on no news – it seems the market is reacting as much to technicals as it is to fundamentals, at least short term. After last week’s poor showing, the market was washed out in the short run, but let’s look longer-term first. In “Tart” 12 (a “table/chart” – focus on colored return boxes along right axis), Discretionary/XLY (cyan color), Health Care/XLV (red) and Tech/XLK (purple) are the generally better performing sectors. Discretionary has been the long term winner, although it weakened some with the recent correction, not that you can tell in the chart below. Health Care has been strong post-Obamacare concerns but it weakened recently with its newly found attention in Washington (which may continue as a negative drag since it’s an election year). Tech found recent strength in this reporting season, helping to move it higher in the longer-term rankings. Finance is the 3rd best sector in the 3 year chart and contrary to what some may believe, it has done fairly well off the financial crisis bottom. Tart 12 – Sector Performance Longer-Term (click to enlarge) In the shorter-term percentage change charts below, the last 4 weeks shows Utilities at the bottom. This is perhaps the single most reliable sector indicator of where to position yourself in the sector rotation model. If Utilities are performing well, be bearish in general, and vice versa. Utilities are currently lagging in this 4 week chart so they are sending a bullish signal despite the pull back last week. Staples (NYSEARCA: XLP ), another sector professionals like to hide in, is also lagging, signaling a bullish perspective. Bunched at the top are brown, purple, dark blue and red, better known as Materials, Tech, Industrials and Healthcare. These are cyclical sectors (ex-XLV) and only Discretionary is missing (which has been weak across the board, a possibly bearish indication). The 2 week picture is less clear and the 1 week has Utilities at the top, reflecting last week’s dismal performance. Since we’re looking for clues to a turn in the market, the focus is one the short-term picture, which is still mixed. Tart 13 – Sector Performance Shorter-Term (click to enlarge) Despite this confusion, the ratio charts are less unclear. IF you’re not familiar with them, I’m made them simpler by aligning the colors and directions. Each panel in Chart 14 has the S&P500 at the top, then the “pairs ratio” symbols (green is the bullish ticker), followed by two ratios at the bottom, a shorter-term one and a longer-term one. The left panel below is the SPY/XLU ratio, and if the SPY (green) is outperforming the XLU (brown), be bullish (foreground is a daily chart that goes back to end of August, the background chart is weekly and just shows since “the crash”). The middle panel is Industrials (NYSEARCA: XLI ) to Utilities , and the right panel is Discretionary to Staples . Except for the weekly XLI/XLU, every ratio is a buy. At the same time, to really understand these charts, you have to realize the blue line is an actual moving average of a ratio line, the slow one, and the black line is the fast ratio moving average line. Therefore, the black and blue lines will move before the signal line gives a signal, and while almost all the signals are bullish green, the black lines have crossed under the blue lines (mostly) and the blue lines are headed down (mostly). What this reflects is we had a strong rally off the late September low (signals went green), but we had a bad week last week (the blue lines are singing the blues, by turning down). Basically this says be bullish but cautious. Chart 14 – Ratio Charts (click to enlarge) The are many other ratios you can look at, and 3 of the most popular are transportation stocks relative to the averages (sort of a Dow Theory off-shoot), high beta (NYSEARCA: SPHB ) to low volatility (NYSEARCA: SPLV ), and Junk bonds (NYSEARCA: JNK ) to (liquid) Corporates (NYSEARCA: LQD ). They too have been trying to change direction, but in this case, they’ve been trying to go from bearish to bullish, but mostly they are failing and rolling back toward bearishness. I would not be too quick to write off the power of these ratios since they are widely followed, even in the hedge fund community . Given the volatility – and variability – in the sector rotation leadership, the signals are still unclear. Or perhaps that is the signal itself; we are in a bull and bear fight, and it is still unresolved. Remember, a secular bear market mauls you, down and up, down and up, again and again. I remain cautious given my long-term secular concerns. Note for readers: Only “real-time alerts” followers receive e-mails notices of posts to my Instablog, where I am trying to publish more frequently.