Epiphany Research

Value, Value Everywhere

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

Here we are again. Another Monday and takeover news dominates the headlines. It seems there is still value out there and if the “pros” see value, then maybe why shouldn’t everyone else. This is creating a little euphoria. Of course, the number of takeovers and LBO’s is, in itself speculative activity, and this is typical during late stage advances. For now, the market continues to push higher. The seasonal upward bias should keep stocks moving higher this week and this merger news is as good a catalyst to get the week off to a good start. We wouldn’t get too caught up in all the hype. We favor the large capitalization names as this is where the underlying demand remains strongest and the risk reward is the best at this point in this divergent rally.

Consumer Discretionary

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

The consumer discretionary sector has rallied very sharply during this rally, but the group is looking extended against a divergent background. John Hughes is highlighting this group in this weeks sector report, but I wanted to show a chart of the ETF against the divergent internal and price momentum indicators. See John's report tomorrow for an in-depth look at the group.

Guru Performance

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

If your wondering how your favorite market guru ranks here is an interesting report. I found it interesting the the best performing guru was a perma-bull and the worst performer was a perma-bear.
www.cxoadvisory.com/gurus/

Oil Services

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

We're seeing an aggressive opportunity in the oil services sector right here. This energy sector  has made some significant improvements in the last month. The broader group has broken out of a large bullish rectangle to the upside and breadth for the sector has broken out to new highs. This is bullish for the broader group.
The oil services sub-sector is the most volatile component of the energy sector. The oil service stocks formed very bearish looking distribution patterns over the last year. Traders get defensive on this sector as they anticipated the end of the energy bull market and a breakdown in crude oil. What we have seen instead is a resurgence in these names that is starting to nullify the bearish chart formations in the sector. When a bearish pattern fails it can be a very bullish situation as traders positioned for a decline on the short side are forced to cover and take the stocks higher. This is an aggressive trade right here, but it's an interesting opportunity.

Fed Day

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

We hate Fed day. The cross currents are crazy and we never seem to get it right. The Fed didn't make any changes, but did put out some dovish language. The market rallied on the report as traders ran with what was perceived as bullish news.
Here's an article from Barry Ritholtz talking about what he believes are important data points driving the Fed and why he doesn't believe in the "soft landing" idea.
http://usmarket.seekingalpha.com/article/22256

Our Biggest Fear

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

We know the FOMC meets tomorrow and that may be the reason the trading has quieted down over the last few days. Our biggest fear is the market may be quieting down here and this choppy trading is what we can expect through year end. Most hedge funds are underperforming the major indexes and are playing here because they have too. We are worried that this has already forced most participants to cover shorts and get long. If that’s the case, the fuel for a further rally may not be there. The market rarely satisfies the majority and with most looking for further upside, it may not be that easy to come by.

It's really all a question of when participants decide to cash in rather then playing one more hand. With three trading weeks left in the year, we are getting closer to that inflection point.

Slowing Down

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

The economic news continues to show a weakening economy. The dollar believes this is the case as it continues to weaken. The bond market believes it’ the case as yields continue to fall. Metals believe it too, as they continue to rally. The stock market however, doesn’t believe it or is just ignoring it. We would be careful with consumer discretionary names at this point, especially the electronics retailers, which are showing signs of weakening and are vulnerable to further weakness. The multi-national consumer staples issues continue to act well and are strengthening with the falling dollar. We would look to this sector for long ideas. Pepsi (PEP) and Kellogg (K), are a couple of names to look at. Yes, we know they are boring, but they look good.

A Little Funky

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

The early rally was not as enthusiastic as the indexes made it appear, Breadth has been flat to negative all session. No increase in downside pressure, but the day, so far, has a sloppy look to Just be cautious, based on this daily price action. In general, we sense a loss of buying interest. Most pundits are in agreement stocks will rally into year end. We aren’t saying they will be wrong, but with everyone looking for such a rally, it would suggest that most participants are invested or more invested. This means a lot of bets have been made and participants are waiting to get paid. This usually leads to a period of lateral performance at best, as most money has been put to work. Commodity issues still acting well, look to energy and precious metals for long ideas.

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.