Watching the Wings

With more than three quarters of the S&P 500 having reported 4th quarter earnings, we did a deep dive into our ETFG Behavioral Quant movers to see what funds are picking up momentum and which are starting to look wistfully at the broader market.  While the healthcare sector continues to see the fastest overall earnings growth, big earnings surprises in the tech sector have blown away analyst’s year end expectations for earnings growth and not surprisingly the sector has come to dominate our Behavioral Quant movers list.

One of the biggest gainers last week was the iShares PHLX Semiconductor ETF (SOXX) which capped the week with a strong 5% advance on the back of Qualcomm’s agreement with China’s National Development and Reform Commission (NDRC) to end its anti-trust investigation and pushed the stock up nearly 6.9% for the week.  SOXX wasn’t the only tech fund to see a strong shift in momentum, as both the iShares U.S. Technology ETF (IYW) and the iShares North American Technology Index fund (IGM) saw a major sentiment shift that sent their Quant scores soaring.  Don’t let their nearly identical names and top ten holdings fool you; there is one major difference between the funds with IGM having nearly 2x the holdings of IYW and includes allocations towards internet retail (Amazon) and services (ADP) that IYW is lacking, although this comes at the expense of a seriously reduced allocation to Apple (9.2% to IYW’s 19.2%).  But that more diversified focus might be the reason why smaller IGM shot past IYW to land at the 16^th spot in our Quant rankings.  Those investors who like to focus on the forward P/E ratio but still love tech stocks might want to take heart; the tech sector is now trading at a forward P/E ratio of 16.1 compared to 17.1 for the market as a whole.

Earnings misses at Citigroup and Morgan Stanley have weighed heavily on the S&P 500’s earnings (in fact quarterly earnings would be up 8.8% ex financials versus the blended 6.3%) and the performance of broad sector trackers such as the Financial Select Sector SPDR (XLF) which in addition to underperforming last week, remains in the red YTD with a loss of 1.21% compared to a 1.85% gain for the broader market.  XLF may have the third weakest behavioral score of any of the select sector SPDR’s, the weakness has spilled over to the SPDR KBW Bank ETF (KBE) and iShares Dow Jones U.S. Financial Services Index Fund ETF (IYG), both of which saw major drops in their Quant Behavioral scores last week.  Unlike the tech ETF’s IYM and IGM, there’s no one underlying name that has been weighing down both funds.  With heavy exposure to large-cap names including last week’s biggest loser, American Express, the amount of pain heaped upon IYG isn’t surprising while KBE’s exposure to those small banks hardest hit by a low interest rate environment (and who stand to benefit the most from expanding net interest margins) has helped it weather the financial storm in 2015.  So far, the fund is only down .21% YTD compared to -1.64% for IYG and -1.21% for XLF.

But for all of those buy and hold investors in bank stocks, the financial sector currently has the lowest forward price-to-earnings ratio in the S&P 500 at 13.5 versus 17.1 for the market as a whole.  And what’s the most “expensive” sector?  Not surprisingly, energy stocks at a forward P/E of 27.6 as collapsing earnings forecasts for the coming year have pushed its forward P/E to more than twice its long-term averages while simultaneously pushing the 4Q revenue growth for the index from 6.1% ex energy to 3.1% as of 2.13.  While there were no energy names on last week’s list of big Quant movers, the Energy Sector Select SPDR fund (XLE) has now outperformed the S&P 500 for 4 straight weeks as energy prices have seemingly stabilized for now.  But even as the energy sector shows signs of life, the heartbeat is starting to fade in the healthcare sector.  Despite having the strongest earnings growth rate in the S&P, the Healthcare Select Sector SPDR (XLV) has now underperformed the market for the last two weeks as surging confidence in equities since the start of February has weakened support for last year’s outperformers like utilities (XLU down 6.5%) and REIT’s (IYR down 1.13%) while healthcare has managed an anemic 2.09% gain.  With above market valuations and high growth forecasts, careful market watchers might want to keep their focus on the sectors at the extreme ends of the market.

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