Deciding Which Bullish Sector to Ride

 | May 15, 2013 | 10:00 AM EDT  | Comments
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vz

I will suspend my opinion about whether the rally is justified and concentrate on what groups you should play if you are bullish.

Our individual readers have a simple goal – to make money -- so you can play anything and everything in the market right now and probably do OK. The fund managers and financial advisers have a tougher problem: They need to outperform a raging bull. So, if you are up, but lagging, you could end up fired. Choose wisely.

As I sort through the various sectors, a key indicator is which groups have the strongest earnings momentum. The upward revision of earnings estimates is a great indicator of which groups are seeing their business conditions strengthen. That can lead to upside surprises and stock outperformance.

The table below ranks the groups of the S&P 500 by earnings revision strength -- the key being that they are ranked relative to the universe as a whole. The number listed under "Earnings Rank" is a decile ranking -- the smaller the number, the higher the group ranks. As we are aggregating many names, the ranks tend to cluster around the average, so one decile difference is actually meaningful.

 

Sector Earnings Momentum
FactSet/FirstCall

 

The results are slightly counterintuitive and worth some study. Energy minerals (basically oil companies) look strong, which makes sense if we are in a cyclical expansion. Health services (hospitals and the like) would not immediately come to mind given the looming impact of Obamacare, but you can't argue with the numbers -- earnings are going up. The Fed is ensuring that the financials look good -- at least for now, but low rates will eventually cause spread compression. Communications is basically Verizon (VZ) and AT&T (T). They look good, although I would not pay an above-market multiple for those names. On the negative side, non-energy minerals (basically miners) look horrific. This is also perplexing, given that quantitative easing should be boosting commodity prices at some point and a cyclical recovery should favor minerals. Hmmmm.

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