Top scoring weekly returns:  Buy and Hold 1 Year

• The best sector is industrial goods

The top sector remains industrial goods.  Consumer goods, services, and financials also score above average.

In consumer goods, focus on mid cap rather than large and small cap.  Large and small cap are better than mid cap in services and financials.

Healthcare scores below average, however mid cap healthcare remains above average.  Technology, basics, and utilities score below average. 

 

The following chart visualizes score by market cap and sector.

The following table provides insight into seasonal trends for the first quarter.   Historically, the DJ30 offers mixed seasonality for Q1, while the other major market ETFs offer solid seasonal tailwinds.  Both small cap (IWM) and mid cap (MDY) have significantly higher median returns during the quarter, gaining 7.07% and 6.91%, respectively -- double the SPY's median return.
 

Keep a close eye on our scores over the coming two weeks because current top scoring baskets move to neutral seasonality, while low scoring baskets net seasonal tailwinds.  We'll be rolling scores to reflect Q1 seasonality next week. 

One of the strongest seasonal baskets for the first quarter is natural gas.  The ^XNG has gained in 8 of the past 10 years, returning a median 3.86% with just a 0.37 correlation to the SPY.  However, due to tracking error, the UNG has not been the way to get exposure.  Software (IGV) is also a top performer in the first quarter, likely thanks to expectations for business and Government spending.   REITS (RWR), energy (XLE) and consumer goods have also gained in 8 of the past 10 years.  
 

 Industrial Goods
 

Industrials lose a bit of their seasonal tailwind during the first quarter.  The XLI has gained in 6 of the past 10 years -- neutral -- posting a median 4.87% return and a 10% standard deviation.

Industrials have been leading our ranking for months so it will be important to see if scores retreat following the shift to Q1.  Companies tied to commercial construction, including steel  (X) and construction equipment (TEX), are among the top scoring.  Machinery (IR, DOV) and equipment (BDC, PH) tied to industrial production also score highly as managers become increasingly comfortable modeling for recovery in Europe.   With its recent ratings cut, will EU markets follow US market footsteps following S&P's 2011 downgrade?  I continue to believe EU recovery poses a strong opportunity for upside surprise in 2014 (note comments below on EU vehicle registration growth under consumer goods).

Consumer Goods
 

Consumer goods offer solid seasonality through the first quarter.  The XLP has gained in 8 of the past 10 years, returning a median 2.6%.

The top scoring consumer companies are heavily skewed toward auto production (GM, BWA, CLC, GNTX).  Keep a close eye on European vehicle registrations in 2014 and watch to see if promotional activity in the U.S. increases.   Commercial vehicle registrations in the EU grew 8.9% year-over-year in November.  Passenger vehicles gained 1.2%, thanks to the UK and Spain (cash-for-clunks = 15% growth).  That marks the first positive YoY change in November since 2009.  Registrations have posted YoY growth in 3 consecutive months, helping reduce the YoY year-to-date decline to -2.7% from last year.  

Services
 

Services offer neutral seasonality in Q1, with the XLY returning a median 2% in the period.  Typically, retailer strength fades following Q4 EPS releases.
 

Transports offer solid first quarter seasonality, increasing in 7 of the past 9 years and returning a median 5.2%.  Rail (CSX), suppliers (TRN), and trucking (HTLD) score high.   Three-month moving average truckload volume is 7.2% above last year, according to Cass.  Truckload linehaul pricing is up 1.8% YoY for both November and year-to-date.  Total U.S. rail carloads are 1.7% higher this year than 2012.
 

Financials
 

Financials also offer neutral first quarter seasonality, returning a median 3.17%.  That said, their post-recession history has been much better with the XLF gaining in each of the past four years, including an 11.5% gain last year.  Performance has been similarly strong over the past four years for capital markets and mid/small cap regional banks.
 

Across financials, asset managers (GBL, PJC, AMP, BLK, SF) are strong thanks to AUM driven fee revenue opportunity tied to equity market gains and rotations out of lower fee producing products.  While I've advocated banks on C&I strength since 2010, I expect consumer loan growth will drive bank loan portfolio growth as banks put excess deposits to work in 2014 (OZRK, HBHC).
 

Economic Data to Watch this Week: 
 

Top Scoring Stocks: