A Value rally, or defensive sector rally?


Author Cam Hui

Posted: 9 Apr 2013

Despite Friday’s disappointing Non-Farm Payroll release, I remain relatively constructive on the stock market’s outlook for several reasons. First, the market sold off on the open, but rallied into the close – a positive sign.

Second, higher beta parts of the market have been outperforming in spite of the negative news. Consider this chart of the relative performance of small caps against the large caps indicating that the risk-on trade may not be done yet.

The risk-on rebound isn’t just confined to the United States. Here is the performance of Greece compared to Europe, which is a key measure of risk aversion:

Here is the relative performance of Italy:

You get the idea.

What about the defensive stock leadership?
The one cautionary sign that I had mentioned last week was the leadership of defensive sectors (see Something’s not right about this rally). I was not the only one to notice this effect. David Rosenberg mentioned it last Thursday and the WSJ featured a comment from UBS on the curious leadership behavior:

As the chart from UBS strategist Jonathan Golub shows, the classic defensive sectors, such as health care and consumer staples, led the way during the first three months of the year, while some of the more cyclical sectors, such as energy and tech, lagged near the bottom of the pack.

Defensive leadership or Value leadership?
There may be a more benign explanation for the leadership of defensive sectors. Value stocks have been outperforming Growth stocks since last June. The chart below of the relative performance of the Russell 1000 Value Index against the Russell 1000 Growth Index tells the story.

It just so happens that the Russell 1000 Value Index is overweight the kinds of sectors that have been outperforming, such as Financials and Utilities and the Russell 1000 Growth Index is overweight the sectors that have been lagging, such as the cyclically sensitive Industrials and Technology.

What’s more, leadership in Value isn’t just a sector effect. A contact of mine at MSCI Barra indicated to me that their factor analysis shows the performance of Value factors like Book to Price and Dividend yield to be outperforming as well. That outperformance was net of industry effects.

Bottom line: The upcoming Earnings Season will give us the best answer to the question of whether the real leadership is defensive stocks, which suggests caution, or Value stocks, which could be neutral to bullish.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

The “Merde” rally?


Author Cam Hui

Posted: 10 May 2012

There is a silver lining in most dark clouds. When the stock market and other risky assets got clobbered over anxieties about Greece today, the silver lining is that a short-term bottom may be forming.

The chart below of SPY is just a bellwether whose analysis could be extrapolated to many other risky assets. The ETF formed a reversal day by selling off but rallying near the end of the day to a level where it roughly opened, and the action occurred on relatively high volume. Moreover, the selloff successfully tested a key short-term support level. For technicians, this action is, at a minimum, an indication of market indecision in the face of bad news – a positive sign. It could be more bullishly interpreted as capitulation selling.

An overreaction to Europe and Greece
As for Greece, things aren’t necessarily as bad as it sounds. Foreign Policy wrote that the surprise showing by SYRIZA, the leftist party that polled in second place in the election, doesn’t necessarily mean that the scenario of a catastrophic Greek exit from the eurozone is necessarily around the corner [emphasis added]:

Even if SYRIZA earns the mandate and manages to somehow seize the reins of power, the changes in Greek policy will hardly be “radical,” as the Coalition of the Radical Left’s name misleadingly implies. The party’s young, charismatic leader, Alexis Tsipras, has made it clear that he has no intentions of withdrawing Greece from the eurozone, let alone the European Union. Instead, we should expect a more nuanced approach to economic revitalization, which would likely include an aggressive renegotiation of the bailout terms currently in place between Greece and the “troika” composed of the EU, the European Central Bank, and the IMF, as well as a demand for more public investment in lieu of loans.

If I were to stretch the point a little further, even Foreign Policy‘s new term to replace “Merkozy” as a characterization of the new Franco-German partnership could also be interpreted bullishly as a contrarian magazine cover indicator:

A short-term Merde bottom?
I previously posted that a short-term bottom may be forming for gold and gold stocks, which is another high beta risky asset:

These readings are suggestive of a tradable short-term bottom in gold and gold stocks is coming up, but a long or even intermediate term bottom may have to wait. Given that gold prices are deflating in the wake of the French and Greek elections, that short-term bottom may be fast approaching.

We may be seeing that short-term trading bottom now. My inner trader wants to buy risk in anticipation of an oversold rally. My inner investor tells me to watch the market action in likely ensuing rally to gauge the strength of the bulls as this is just another phase in the choppy up-and-down market action that we have been witnessing in the past few weeks.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Equity markets are betting on the consumer


Author Cam Hui

Posted: 26 Mar 2012

Last week, I wrote that the character of the stock market had changed. The market had gone from a central bank liquidity driven rally, which favors hard assets and asset inflation plays, to a focus on the American consumer as a source of growth (see This bull depends on the US consumer).

To review, leadership had gone to Consumer Discretionary stocks, which was in a relative uptrend against the broad market:

…and Financials, which had broken its relative downtrend line and has now staged a relative breakout through resistance:

Europe mirrors the US
I reviewed the chart patterns of the European sectors on the weekend and (to my surprise) found a similar pattern. European Financials had broken out of a relative downtrend, but they weren’t as strong as American Financials as they have not yet staged a relative breakout, but appear to be undergoing a sideways relative consolidation:

European consumer stocks are broken down as Consumer Goods and Consumer Services, which is not quite the same categorization that we find in the United States. Nevertheless, I was surprised to see that the European Consumer Goods sector has been in a long relative uptrend against the market and had staged a relative breakout and pullback after spending several months undergoing a sideways consolidation period:

The European Consumer Services sector was not as strong, but had nevertheless provided leadership in the latest rally.

Market bullish on US and Europe consumer, but worried about China
When I look around the world and listen to the market, the stock markets are telling me that first stage booster of central bank liquidity has dropped and and it’s up to the second stage rocket, namely the American and European consumer, is on course to lift us past escape velocity. There is one drag to our rocket, however, and that’s the prospect of a slowdown in China, as the weakness in commodity prices and commodity sensitive currencies are signaling those concerns.

Expect a rally, but define your risk tolerance
A bullish bet is therefore a bet on the health of the American and European consumer – and that is indeed a fragile foundation for a rally. Nevertheless, unless I am convinced otherwise the stock market remains in an uptrend. The chart below shows the weekly NYSE Summation Index, which is a breadth indicator, which I have overlaid a slow stochastic, an overbought/oversold indicator. If past history is any guide, stocks are tactically oversold and likely to rally in the next couple of weeks.

If you believe that we are in an uptrend, then the current period is likely to resemble the circled December 2010 correction and consolidation period in the middle of the QE2 rally. If you believe that the market is likely to correct further, another analog (circled) might correspond to the weakness seen in June 2010.

In both cases, the oversold readings of the stochastic point to a tactical rally in stocks for the next couple of weeks. In all cases, it would be wise to stay long, but carefully define your risk tolerance with the appropriate stop loss orders. In the meantime, watch the news flow and in particular closely watch how the market reacts to news coming out of China.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Hold your nose and “rent” the junk


Author Cam Hui

Posted: 13 Feb 2011

The stock rally in 2012 has been characterized by a low-quality rally, or “dash for trash”. I wrote here that investors were under-invested in equities and have been rushing for the entrance. They have been chasing the low-quality high-beta names as a way to quickly increase their equity exposure.

If I am right in my thesis that we are in the midst of a buying panic, then the low-quality theme makes sense as a trade. The way to participate is through the use of the Phoenix strategy.

The Phoenix rises again?
I gave a buy list of Phoenix stocks on February 24, 2009, shortly before the ultimate bottom in the stock market in March 2009. The idea behind the strategy is to find beaten down stocks that barely survived the bear market and have the financial or operational leverage to benefit from the coming upturn.

The February 24, 2009 list produced many winners. Notable among them were household names such as the Bank of America (BAC):

Liz Claiborne (LIZ):

…and Saks (SKS):

Different macro backdrop, but still dashing for trash
This time, the macro backdrop is different. We were not in a recession, though arguably it has been a period of anemic economic growth, so the situation for many companies isn’t as dire as it was in late 2008 and early 2009. Nevertheless, Phoenix does make sense as a way to participate in the “dash for trash” theme.

With that in mind, I screen the members of the Russell 3000 for the following characteristics:

  • Stock price below $8 (lower quality, high beta names)
  • One year return of -50% or less (beaten down stocks)
  • Market capitalization of $100 million or more (must be “real” companies)
  • Net positive insider buying (number insider buys – number of insider sells > 0, which should provide some downside support should our thesis turn out to be wrong)

I came up with the following 39 names:

American Superconductor Corp (AMSC), ATP Oil & Gas Corp/United States (ATPG), Aviat Networks Inc (AVNW), Broadwind Energy Inc (BWEN), Central European Distribution Corp (CEDC), Clearwire Corp (CLWR), Cleveland Biolabs Inc (CBLI), Coldwater Creek Inc (CWTR), Demand Media Inc (DMD), EXCO Resources Inc (XCO), Fairpoint Communications Inc (FRP), Frontier Communications Corp (FTR), Gentiva Health Services Inc (GTIV), Geron Corp (GERN), Globalstar Inc (GSAT), Hampton Roads Bankshares Inc (HMPR), IntraLinks Holdings Inc (IL), Kratos Defense & Security Solutions Inc (KTOS), K-Swiss Inc (KSWS), MEMC Electronic Materials Inc (WFR), Meritor Inc (MTOR), MGIC Investment Corp (MTG), Monster Worldwide Inc (MWW), Office Depot Inc (ODP), OfficeMax Inc (OMX), Opnext Inc (OPXT), Overstock.com Inc (OSTK), Pacific Biosciences of California Inc (PACB), Popular Inc (BPOP), Quepasa Corp (QPSA), Radian Group Inc (RDN), RAIT Financial Trust (RAS), Savient Pharmaceuticals Inc (SVNT), SIGA Technologies Inc (SIGA), Sigma Designs Inc (SIGM), Skilled Healthcare Group Inc (SKH), Sun Healthcare Group Inc (SUNH), TriQuint Semiconductor Inc (TQNT) and Willbros Group Inc (WG).

Important caveats and disclaimers
I know nothing about your investment objectives and risk tolerance so don’t construe this as investment advice as this may not be a suitable strategy for you.

This is obviously a high risk approach and I would take the following steps to control risk. First of all, determine how much of your portfolio you want to put into this strategy as 100% commitment is not suitable for pretty much everyone. Second, diversification is critical. I have received feedback when I last issued the call to buy into the Phoenix strategy about this stock or that stock not working out. If you do employ this strategy, you should buy a basket of these stocks and not focus on just one or two names.

Do your own due diligence on the stocks on the list. For some investors, this list could serve as a starting point to do some investigation of their own. As well, define your risk tolerance carefully, either on an individual stock basis and/or on a portfolio basis.

Lastly, this is a momentum dependent strategy that should be rented and not owned. As soon as momentum wanes, that will be the exit signal.

You’re on your own.

A shorter list
If 39 names is too much for you to think about, then I winnowed the list down to eight names by requiring that there are no insider sells (instead of just positive net insider buying) and heavy insider buying, defined as more than five insider buys within the last six months:

ATP Oil & Gas Corp/United States (ATPG), Coldwater Creek Inc (CWTR), Gentiva Health Services Inc (GTIV), MEMC Electronic Materials Inc (WFR), Savient Pharmaceuticals Inc (SVNT), SIGA Technologies Inc (SIGA), Sun Healthcare Group Inc (SUNH) and Willbros Group Inc (WG).

Since the market rally has been going on for several months, buying into a Phoenix strategy now is being late in the game. However, as equity underweight investors rush to get into the stocks, this strategy should yield some decent returns if my investment thesis is correct. One important component of this approach is to watch momentum indicators carefully. When they start to turn down, then it’s time to get out.

Be bold. This is the time to hold your nose and “rent” the junk.

Full disclosure: I am personally long ATPG and SVNT and may seek to get long the other names mentioned in the days to come.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

 

Buy the dips & sell the rallies


Author Cam Hui

Posted: 04 Jan 2012 12:33 AM PST

I recently wrote that 2011 was a choppy market where it was very difficult for institutional investors to beat the market and for hedge funds to make any money because of the tendency of the market to whipsaw. In that case, my inner trader has observed that there is potential for nimble traders to profit from trading the swings of a range-bound market by buying the dips and selling the rallies.

The chart below shows the relative performance of SPY, which represents US stocks and the risk-on trade, against TLT, which represents long Treasury bonds and the risk-off trade. I have overlaid on top a short horizoned RSI indicator of 7 days. Note how it has been profitable to sell stocks and buy bonds when RSI approaches the 60-65 level and buy stocks and sell bonds RSI goes below 30.

Where are we now? With the opening day rally yesterday, the SPY/TLT 7-day RSI stands at 55, which is very near the sell zone for stocks, indicating that the upside is limited – unless you believe that stocks are on the verge of a major upside move.

My short term liquidity measures is also telling my inner trader to sell this rally. Measures of MZM growth are flattening out, which is generally not conducive to a sustainable equity rally, after an uptrend that largely coincided with QE2 earlier last year.

This chart of the growth of broader monetary aggregates also tell the same story. Money supply growth is now either flattening out or decelerating after a period of acceleration that began in mid-2010. Everything else being equal, an environment of slowing money supply growth usually provide headwinds to further advances in equity prices.

My inner traders is telling me that the upside in stocks is limited at these levels and to fade this rally, but to be prepared to buy the dips.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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