Industry Group Rankings Can Shed Light On Market Status
The market’s uptrend is under pressure. The Nasdaq is below its 200-day line and testing support at its 50-day moving average. So what are industry groups telling us about current market circumstances? IBD tracks industry group rankings for many reasons. Rising industries can be indicators of where money is flowing and where leadership might come from to support unfolding market rallies. Within rallies, top-ranked industries act as breeding grounds for new leaders. When markets turn difficult, changes in industry rankings can counsel investors on how defensive or how aggressive to be. What do they say right now? At first glance, industries don’t appear to be in much of a defensive stance. Utilities, which are classic defensive indicators, led the rankings near the beginning of March. Now they have pulled back to just outside the top 20 industry groups that normally constitute the core leadership of the market. Water utilities ranked No. 22 on Monday. Electrical utilities were No. 35. Diversified utilities were No. 39. There are some defensive flashes in the top 20. The Retail-Discount & Variety stores group is made up primarily of dollar store chains. Those stocks have some growth characteristics but are often considered a defensive group. The bigger defensive caution comes from gold miners. The Mining-Gold/Silver/Gems group continues to hold its No. 1 ranking. The position owes to gold prices, which are up about 21% this year and could move higher as the Federal Reserve contemplates furthering its rate hike program in June. But it also shows investors seeking a safe haven from volatile assets — this makes gold defensive. Rising gold prices also tend to mean more profit from gold miners, which have struggled against falling profits since 2011-12. This year that appears set to turn around. Barrick Gold ( ABX ) last week reported stronger-than-expected Q1 results, and its first profit increase since Q4 2012. Analysts expect the triple-digit gain to be followed by another in Q2, with consensus EPS forecasts for a 60% gain this year. Try a free trial at IBD’s Leaderboard to get in depth chart analysis of gold ETF SPDR Gold Trust A number of other miners, including Newmont Mining ( NEM ), Randgold Resources ( GOLD ) and Goldcorp ( GG ) are also expected to see an earnings turnaround this year. That suggests that the strength of the mining group is not strictly linked to defensive factors. Non-defensive groups in the top 20 strongest industry groups include heavy construction firms, building products retailers and the material handling/automation group, home to additive printer makers 3D Systems ( DDD ) and Stratasys ( SSYS ). The rebound in makers of heavy mining and construction equipment goes hand in hand with gains by makers of heavy trucks and parts: Both are positive signs for investor confidence. The rise of medical systems makers suggests hospitals may be returning to a buying mode. The collection of steel and metal groups in the top rankings is more of a question mark. Steel makers have climbed on optimism that China, by far the world’s largest steel maker, has pledged to deal with overcapacity in its steel sector. As a group, steel makers are up 90% from a January low, which explains the group’s No. 4 ranking. Earnings forecasts call for a patchy recovery across the group this year, led by Ternium ( TX ), Steel Dynamics ( STLD ) and South Korea’s POSCO ( PKX ). At the bottom of the industry rankings, retail groups hold 4 of the 5 weakest positions. No. 197 is Retail/Wholesale Automobile, with department stores, jewelry and consumer electronics close behind. Generic drug makers and drug distributors are also in the hole. The overall message appears to be that the market could turn defensive quickly, but it is not there right now, and it’s currently in position to offer new leadership if the market turns more bullish.