Stocks No Longer Moving In Unison

1/23/2017


The major averages have been moving mostly sideways since mid-December, with investors rethinking some of their initial enthusiasm for "Trump plays" like banks and small-company stocks. Still, with the Dow Theory in the bullish camp, we are maintaining a nearly fully invested posture.

Market diversity

While the major averages have made little progress recently, sectors and individual stocks have made notable moves beneath the surface. In fact, measures of market diversity — the extent to which individual stock returns vary — have moved to the highest level since the financial crisis in 2008. Dispersion between sector returns has also jumped.

Investors should be prepared for a stock pickers' market in the year ahead. Because of the Federal Reserve's retreat from easy-money policies, stocks will no longer rise in unison, riding a tide of freshly minted money.

Also, the potential for new tax and spending policies means stocks could swing in different directions in 2017. Over the last couple of weeks, President Trump has surprised his Republican allies in Congress with statements calling for Obamacare to be replaced with a health plan that provides "insurance for everybody."

He also criticized Republicans' border-adjustment provision — a key part of their plan to reduce corporate taxes — as "too complicated." The provision, designed to encourage companies to keep production in the U.S., would tax imports and exempt exports.

Sector valuations and Quadrix Overall scores
-- Median Trailing P/E --
Recent P/E
As % Of
Norm
% of Months
Lower Than
Recent Since 1994
Sector
Recent
Norm
Since 1994
Technology
25.9
24.4
106
72
Telecom
25.2
19.1
132
88
Health care
23.9
22.3
107
66
Energy
22.5
17.9
126
83
Industrials
22.2
18.2
122
97
Consumer staples
22.2
19.4
114
82
Materials
21.3
17.3
123
94
Utilities
20.2
15.4
131
97
Financials
19.7
14.9
132
98
Consumer discretionary
18.1
17.5
104
57
All S&P 1500 stocks
21.4
18.1
118
98
Median Quadrix
------ Overall Score ------
Recent
Score As %
Of Norm
% of Months
Lower Than
Recent Since 1994
Sector
Recent
Norm
Since 1994
Financials
75
67
112
85
Consumer discretionary
72
64
113
94
Technolgy
59
57
104
57
Industrials
59
62
94
26
Health care
58
61
95
43
Utilities
53
52
101
56
Consumer staples
50
57
87
18
Materials
48
54
89
17
Telecom
45
51
88
24
Energy
19
62
31
2
S&P 1500 Index stocks
59
60
99
43

Rather than try to predict how policy will unfold, investors should focus on company fundamentals. As shown in the nearby tables, the technology, health-care, and consumer-discretionary sectors trade at the lowest trailing price/earnings ratios relative to their norms since 1994 though they're still at a slight premium. The financials, consumer-discretionary, and technology sectors look best based on Overall Quadrix score.

Conclusion

Our Buy List and Focus List have 100% in stocks, while our Long-Term Buy List has 94%. Consumer-discretionary and technology stocks are amply represented on our buy lists. Top picks in those sectors include Lear ($142; LEA) and Citrix Systems ($94; CTXS).


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