Epiphany Research

Internal Divergence

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

I wanted to post a chart of one of the internal divergences we have been talking about recently. This is the divergence in the % of stocks > 40-day indicator for the Russell 3000. We can see that the index has rallied across the range and is testing the top of the uptrend channel (2 standard deviation channel). The push higher is coming on less participation than we saw at the October peaks. This is classic. Proceed carefully from this point forward.

Energy Names

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

We talked about the bullish setup in the energy stocks in our daily report sometime last week. In spite of a rash of bearish distributive patterns forming in the sector over the last several months, especially in the service sector, we did see breadth hold on and approach new highs. We stated that this group may end up looking a lot like the utility sector last year if crude oil prices move out turn up and act as a bullish catalyst.
Here are several names in the sector that look interesting.

Breadth Is the Key

John hughes jhughes@epiphanyresearch.com 212-692-6391

We aren’t seeing to much moving this morning. Stocks are basically flat, digesting their recent gains. This isn’t anything unusual. We aren’t seeing any increase in selling pressure either. This suggests the game is still on for now and participants are looking for further upside. Optimism does continue to grow and the internal background remains divergent, it just doesn’t matter…..yet! We see this price action as being very similar to the fourth quarter of 2004. There was a rally into year end that year too, as participants were once again chasing performance. The key to the current rally most likely lies in breadth. Breadth has so far confirmed the new highs in the indexes. Any deterioration in breadth would be a strong warnings sign that the rally may have run its course. We will obviously let you know if and when that happens

Hedge Fund Holdings 3Q 06'

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

I saw a good good post from Lazlo Birinyi's Ticker Sense on the largest holdings of the top 50 hedge funds.  I was surprised by the large holdings in Finance and Consumer Staples during this rally.

http://usmarket.seekingalpha.com/article/21131

BTW Seeking Alpha is a great website and well worth taking a look at.

http://seekingalpha.com/

Sector Selection Part 2

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

We just wanted to show the best performing sectors on an equal weight basis over the last 200-day period. No.1 and No.2 are insurance and gaming! Huh? We would urge traders here to drop whatever sector biases you have and take a fresh look at the market from a sector standpoint. Having the correct sector exposure is  key here to staying on the right side of this market. As we can see in the chart below the top third of the sectors have made all the returns over the last 200-day period. If you've been in the wrong sectors it's been tough.

Broad-Base

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Let's be clear. This is a broad based rally. We know this because the NYSE and SPX breadth are breaking out to new highs. Is this a really broad-based move that has created a "can't miss" environment? No, it isn't. We have to work to get ahead in this trading environment, but the profits are there to be had if you're positioned right.
We believe the heavy influence of momentum based traders is causing serious cross currents that have created sector bifurcations and an overall choppy situation, especially for breakout traders. We don't see how that aspect of the market is going to get better anytime soon, but we can tell you that since the correction lows this summer liquidity has come back into this market and there has been a broad-based rally.
I believe a lot of traders need to go back to the drawing board on their sector work and make sure they are positioning themselves in the right groups and not simply falling back in to comfortable patterns that they've had over the last several years (like trading semi's when there is nothing going on in the sector, or energy when the group has been flat since February). In my opinion good sector work is really the key to navigating this market.

Rotation Nation

John Hughes 212-692-6391 jhughes@epiphanyresearch.com

 

Putting aside our petty differences on the bull versus bear argument, we are all, in one sense, in the same boat. That boats’ name is “Can’t Make Money” It seems most, if not everyone, we talk to are struggling to make money. Time is running out on the year and this is adding pressure to find performance. It seems the harder you try to find that performance the more elusive it becomes. We have often referred to the participation in this rally narrowing, but this is not the most accurate description. The price action feels narrow, but it is more a situation of rotation that is creating the biggest challenge for participants. Each day it is a different sector or individual stock that is responsible for the gains. Staying with this rotation is next to impossible and this is forcing money to move from one group to the next on a daily basis in order to find performance. It's not easy and it isn't much fun either.

Lord, You Know it Ain't Easy

 

John Hughes 212-692-6391 jhughes@epiphanyreserach.com

The market is going up. Every day the Dow Jones Industrials moves higher, setting another closing high. All the news, whether it be the Democrats sweeping both houses of congress, or low interest rates, or strong economic data, is all good. There is no bad news. So, it would make sense that it is easy to make money on the long side since there is no downside pressure and stocks keep moving higher. There may be money being made on the long side, but it sure isn’t easy. Each day it remains a few names that account for the bulk of the strength. Last week, the Dow was up about 1%. Boeing was responsible for just about on third of that rise. Tough to keep pace if you didn’t own Boeing. We may not have much more of a choice than playing the long side, but don’t be fooled. Making money isn’t as easy as it looks.

Sector Performance

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

If your not feeling the full benefit of this rally over the last month it probably has something to do with your sector selection. The fact is that I would be surprised if you were in the best performing sectors over the last 40-day period. The best performing group was biotechnology, followed by insurance, wireless, specialty retail, telecom, internet, and industrial materials. The only sector out of this group I've heard real interest in has been insurance. The rest of these sectors, especially biotech, wireless, telecom and internet have been treated as interesting anomalies at best. I hear more talk from the bulls and the bear on semiconductors and energy then any other sectors.The semiconductor sector has been flat since September and the energy sector has been net flat since February. This is a good example of how our biases have us looking in the wrong place sometimes. 

A Surge..............

John Hughes 212-692-6391 jhughes@epiphanyresearch.com

 

Listening to the financial press this morning, I heard more than one reporter refer to yesterday’s price gains as a “SURGE” in prices. Now, even the most optimistic and most bullish person on this rally would have a hard time describing a 20 point rally in the Dow Industrials as a surge. Maybe it’s just the liberal media trying to convince the masses the Democrat victory was good for the financial markets. I would argue if that’s a celebration, it’s akin to a few chaffing dishes at the local K of C hall, not a huge gala in a ballroom. The reality is the market had no expectation the democrats wouldn’t take over and if there was a reaction at all, it was no reaction. The market continues to go on its merry way, moving methodically higher in rotational fashion. Meanwhile, back at the ranch, the market internals continue to show further deterioration. This means it will be increasingly difficult to benefit form any further advance.