The Zacks Analyst Blog Highlights: PowerShares Dynamic Semiconductor Portfolio, Market Vectors Semiconductor ETF, SPDR Technology Sector ETF, PowerShares Dynamic Technology Sector Portfolio and Guggenheim S&P 500 Equal Weighed

Oct 16, 2013, 09:37 ET from Zacks Investment Research, Inc.

CHICAGO, Oct. 16, 2013 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the The PowerShares Dynamic Semiconductor Portfolio (AMEX: PSI-Free Report), Market Vectors Semiconductor ETF (AMEX: SMH-Free Report), The SPDR Technology Sector ETF (AMEX: XLK-Free Report), The PowerShares Dynamic Technology Sector Portfolio (AMEX: PTF-Free Report) and Guggenheim S&P 500 Equal Weighed ETF (AMEX: RYT-Free Report).


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Here are highlights from Tuesday's Analyst Blog:

The Value in Technology

There seems to be an undercurrent in the market where many traders believe stocks are near fair value.  The rally in 2013 has been mostly a function of PE multiple expansion, as the profit growth picture has not shown material strength. 4-quarter trailing operating earnings per share for the S&P 500 have risen just 1% year over year between Q2 2013 and Q2 2012.  Moreover, with the government shutdown there may be some marginal pressure on U.S. growth in Q4, but this is offset by improved economic prospects in Europe and Japan.

One way to value equities:

There are a number of ways to value the equity market, but one popular measure is the 12 month forward PE ratio.  Investors like to price the market on the outlook for earnings.  Earnings estimates are usually optimistic, and this creates a situation where earnings can be revised down over time.  However, this dynamic is standardized by looking at a history of the forward PE ratio.  

Forward PE ratios by sector:

Let's take a look at the 12 month forward PE ratio for the ten major sectors of the S&P 500 for insight into the market's valuation.  The IT sector is the most inexpensive sector relative to the average. Telecom was the next cheapest group.  Industrials were a close third. The market is not paying up for industrials which is consistent with the sluggish growth picture.

The most expensive group was the utility sector.  The search for yield and desire for stability may be at work in lifting the valuation of this group.  Further, slow earnings growth argues for defensive exposure.

The material sector was the next most expensive, but trading near its average forward PE.   The market is not willing to pay a material premium for the commodity sector given the still slow growth outlook.

It may be noteworthy that the market is not overly pessimistic about the consumer discretionary sector.  The discount to average is small despite worries over soft back to school spending, adverse fall weather for apparel sales, and higher mortgage rates crimping housing and refinance activity.  Autos sales are a bright spot.

Every sector has seen PE ratio expand since August.  On a percentage basis, the biggest increase occurred in the telecom sector followed by financials.  The smallest increase occurred in consumer staples.

Investor may look to chase return:

Looking at the HFRX indices, hedge fund community returns are badly lagging the S&P 500.  The HFRX Equity Hedge Index was up 7.0% year to date through October 10.  Event driven and special situation were the categories with the greatest return up 14.5% and 11.1% respectively. By comparison, the total return for the S&P 500 was up 20.7%.

With the poor performance in the professional community, it is possible investors do some return chasing into the end of the year.  This may be especial true if Washington calms down and the debt ceiling and government shutdown are resolved. The technology sector may be a place where investors look to place money given its cheap relative valuation.

Ways to play:

The chip sector may be one place to look for year-end strength.  The PowerShares Dynamic Semiconductor Portfolio (AMEX: PSI-Free Report) has already broken into new high territory, and it looks like the Market Vectors Semiconductor ETF (AMEX: SMH-Free Report) is set to follow.

The SPDR Technology Sector ETF (AMEX: XLK-Free Report) is a blanket way to find exposure to technology, but it has lagged the overall market up 12.8% through October 11.  The PowerShares Dynamic Technology Sector Portfolio (AMEX: PTF-Free Report) and the Guggenheim S&P 500 Equal Weighed ETF (AMEX: RYT-Free Report) have posted much stronger results up 25.2% and 27.7% respectively.

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