Posts Tagged ‘Sector Rotation’
Saturday, August 11th, 2012
U.S. Equity Market Radar (August 13, 2012)
The S&P 500 Index rose 1.07 percent this week as the equity market has rallied for five weeks in a row. It has been a choppy ride but the market is looking past the current economic weakness and focusing on expected government policy action. Cyclicals led the way this week with materials, energy and technology setting the pace. Defensive, lower beta sectors such as utilities and consumer staples were down for the week.
Strengths
- The materials sector was the best performer this week rising 2.83 percent driven by a rally in the steel and metals and mining areas. Standout performers included Freeport—McMoRan, U.S. Steel and Allegheny Technology.
- The energy sector also performed well with coal names particularly strong. Coal companies Consol Energy, Peabody Energy and Alpha Natural Resources all rose by more than 6 percent as interest in the space returns as the entire sector has been under tremendous pressure over the past year with many stocks in this space down 50 percent or more.
- Dean Foods was the best performer in the S&P 500 this week rising by 36 percent as the company announced it will spin off its organic and soy milk operation.
Weaknesses
- The utility sector lagged on what appeared to be sector rotation into more cyclical areas. Utilities have still outperformed over the past three months.
- Consumer staples also underperformed this week, likely due to sector rotation.
- Monster Beverage was the worst performer this week in the S&P 500, falling by nearly 19 percent. The company reported earnings that disappointed and the company announced it had received a subpoena relating to energy drink sales and promotion.
Opportunity
- The market remains focused on the potential monetary policy action from the European Central Bank (ECB) and China and is looking past the current economic weakness.
Threat
- While policy makers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
- The S&P 500 is now less than 1 percent away from the highs reached in April and is at a technical resistance level.
Tags: Alpha Natural Resources, Coal Companies, Consol Energy, Consumer Staples, Cyclicals, Dean Foods, ECB, Economic Weakness, Energy Drink, energy sector, Freeport Mcmoran, Market Radar, Materials Sector, Mining Areas, oil, Peabody Energy, Promotion Opportunity, Sector Rotation, Setting The Pace, Space Down, Utility Sector
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Wednesday, April 25th, 2012
Even in a downtrend since late March, the market is not making it easy for those awaiting this pullback. Selling bouts are met with oversold bounces quite quickly, and the action is not consistent in one direction for that many days in a row. The S&P is back above the key 1370 level this morning, after breaking the key 1370 level yesterday. And since it’s key that is leading to a lot of choppiness. But bigger picture we continue to see a market under distribution, and what appears to be a ‘head and shoulders’ formation being created on the senior indexes. If you are unfamiliar with the term, please google it.
Yesterday I mentioned we had two key points of support – that was last week’s lows of 1365 and the previous week’s lows of 1357. Both came into play yesterday as the market ultimately bounced just above the latter level and finished just above the former level. If 1357 were to break, the next key level is 1340. But for now, as noted – the buyers keep pushing the market back above 1370 on each dip. However each rally is on light volume, while each selling bout is on heavy – hence all the distribution days.
I’d also point out that we are having a sector rotation under the surface even as the major indexes are down less than 5%. Just about the entire momentum growth stock universe is taking turns getting hit. And some of it is very random – take Ulta Salon (ULTA) today. I cannot find any news, so unless something pops up later today I have to assume some big boys are liquidating as volume is huge. But this is exactly the type of action that can rip away a lot of your money as you search for ‘relative strength’ – pile in, waiting for a bounce day like today, only to be punched in the face.
Today we popped a bit in the broader market on some housing data but in the big picture that data remains quite weak… I think it was more of an excuse to simply get an oversold bounce going. Yesterday’s gap (137.87) has not yet been filled but we saw the gap down post Good Friday took about a week and a half to be filled and then some chop, and then back down. So no one should be surprised to see a run to fill this gap later today or tomorrow morning (with Apple’s blessing). At this point with a long series of distribution days in the market we need to see a true change of character to feel like these moves up are anything but head fakes and frustrating moments for the bears.
Obviously key events are Apple earnings tonight and FOMC Meeting and Bernanke quarterly update Thursday. But Europe has not gone away, even though the market some days act like it after their markets close. I don’t think the path is much different than it has been repeatedly the past few years – things will downgrade, people will sit on their hands until it gets really bad, then people will panic as the situation worsens, and then Germany or the central bank will step in to kick the can. Markets will surge on the kick the can for however long that can stays in the air. We’ll rinse, wash, and repeat - until we do it again. It’s Groundhog Day as their system is broken due to lack of autonomy for each country or the ability to print their way out of messes ala UK, Japan, USA. See Iceland for an example – they defaulted on much of their debt, devalued their currency like mad and are back to growth. You never hear about them anymore since they had the independence to do such things.
Tags: Amp, Big Boys, Big Picture, Bounce, Bounces, Bouts, Choppiness, Day Like Today, Excuse, Google, Growth Stock, Head And Shoulders, Indexes, Light Volume, Lows, Momentum, Pullback, Rally, Relative Strength, Sector Rotation
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Thursday, February 23rd, 2012
Think for a minute, if you will, about your equity portfolio. Do your investments there reflect any sentiment around sectors? For example, you may have shed some of your financial stocks over the past few years. Or you may see opportunity in industrials, so you’ve chosen a mutual fund or ETF that gives you exposure.
No matter which investment vehicle you’re using, chances are that your opinions about sectors are somehow reflected in your equity investments. But often that’s not the case in the fixed income portion of investors’ portfolios. With the investing tools available today – fixed income ETFs being a powerful example – expressing a precise view on bond sectors may be easier than you think.
The US corporate bond market is comprised of 3 sectors: financials (33%), industrials (56%), and utilities (11%). Bonds are classified into one of these sectors based on the issuer’s primary line of business and the revenue streams that are used to repay their debt. As you can see in the periodic table below, the disparity of returns between these three is notable – the average annual return difference between the top and bottom performing sectors has been 4.2% in the past 10 years.
The returns also tell a story about the performance of the US economy over the past decade. From the strong performance in corporate bonds leading up to the financial crisis, to the underperformance of financials in 2008, and then the rebound that all three sectors experienced in 2009 and 2010.
Fixed income ETFs provide a compelling solution for investors wanting to make tactical plays or employ a sector rotation strategy in their bond portfolio. For example, if you have a negative view of financials, you can reduce your overall exposure to the sector by buying a broad corporate bond ETF (such as LQD) and then tactically overweighting an industrials ETF (such as ENGN) and a utilities ETF (such as AMPS). Or, a more hands-on approach might be to buy all three sector funds (ENGN, AMPS, and MONY), and then tactically manage the weights based on current themes and market events. No matter which strategy you choose, there is now a new set of tools to implement your views.
Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Bonds and bond funds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. The Fund is subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.
Tags: Bond Portfolio, Corporate Bond Market, Corporate Bonds, Disparity, Equity Investments, ETF, Financial Crisis, financial stocks, Fixed Income, Industrials, Investing Tools, Investment Vehicle, Line Of Business, Lqd, Mutual Fund, Periodic Table, Precise View, Rebound, Revenue Streams, Sector Rotation
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Friday, January 13th, 2012
The nature of this rally in its ‘exclusivity’ has been quite striking. While I said near the turn of the year we needed to see a broadening into new sectors for the rally off the December 19th low, I – nor anyone – could anticipate how things turned on a dime in terms of sector rotation. One does not expect the previous sector leadership to completely be abandoned in lieu of the new sectors – instead the general playbook is a broadening of strength with new groups taking the baton from the old, but both (the old and the new) doing well in a relative sense Usually all most groups will participate in a broader market upswing, but that has not been the nature of this leg of the rally; it has all happened in 3 broad sectors. These were of course the laggards of latter 2011 so you had to do a complete flip out of the winning sectors and into the laggards – or have a very difficult time generating any performance.
Let me show you graphically (using sector SPDR ETFs) how mutually exclusive this rally has been thus far.
This first graph is roughly a 5 week period leading up the December 19th bottom – one can see the defensive sectors leading: consumer staples, healthcare, utilities. All other groups were either flat or sharply negative.
[click to enlarge]
While not broken out below (as the chart is from Dec 19th forward), the first week or so if this move off the Dec 19 bottom actually was focused on the same groups listed above – hence the underperformance seen below since Jan 1 in utilities and consumer staples is even worse than the chart shows. Then on the turn of the year it is as if a light switch went on and all the money was moved into the new 3 new winning sectors: financials, materials, and industrials. All of this movement has essentially been post Jan 1.
[click to enlarge]
If you are like me, staring at a gaggle of stocks (many former leaders of late 2011) on watch lists that are (a) doing nothing or (b) retreating in 2012 – while the broader indexes continue to either move sideways (6 sessions this year) or gap up (2 sessions this year) – this is your explanation. If you are not positioned in this select group of sectors, you have had little to no opportunities of late to make money on the long side. Worse, anyone who shorted “weakness” coming into the year received a double whammy. 2011′s “weakness” is where the money has been made thus far in 2012 – almost exclusively.
Side note – it is strange that technology, as a broader sector, has been flat in 2012 – as it would generally move with the ‘growthy’ sectors that have been this year’s favorites. It looks like whatever strength has been seen in semiconductors (a very cyclical group) has been offset by weakness in other areas such as software. Energy has also generally been a laggard in 2012 relative to materials (generally they move together); another quirk of this new year rally.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
Tags: Br, Consumer Staples, Exclusivity, Gaggle, Graph, Industrials, Laggards, Light Switch, Market Upswing, Money, Nature, New Groups, Playbook, Rally, Relative Sense, Sector Leadership, Sector Rotation, Sectors, Stocks
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Tuesday, February 1st, 2011
The Narrowing Gap between US and Emerging Markets in 2011
Prepared by John Zechner, JZechner Associates, sub-advisor to NexGen Financial.
January 2011
Going forward, we remain positive on the outlook for stocks over the next 2-3 year period and have positioned your portfolio accordingly, even though we are more wary about a short-term correction in the stock market given the sharp advances since last August. In terms of the portfolio themes, the stocks still reflect an outlook for expanding global economic growth. The only difference is that we think that growth will slow down to more normal rates in the Emerging Economies (particularly China) and will pick up somewhat in North America. This should lead to better performance from domestic stock sectors such as retailing, autos, housing, rail, technology and even financials. On the other side, we don’t expect commodity stocks to continue to dominate the gains the way they have in the past two years even though they may continue to rise. The gains should come more from volume growth as opposed to price growth. We will continue to monitor all economic developments though and shift the portfolios accordingly and in line with the opportunities presented by the market.
At month end the Fund had an asset mix of 53.8% of its assets in stocks, 22.9% in fixed income and 23.3% in cash. Within the stock component, 74% of those assets were in Canadian stocks and the remaining 26% was in US stocks, primarily in the Technology and Financial sectors.
Canadian Balanced Growth Fund – Review and Strategy
We had another month of exceptionally strong relative performance in the NexGen Canadian Balanced Growth Fund in December as Asset Mix, Sector Rotation and Stock Selection all contributed to the gains. We generated returns for the month, the 4th quarter and the full year which were all well ahead of the Benchmark Performance Measure for this fund. The Asset Mix favoured stocks, which again did better than bonds last month. Sector overweight positions in the resource stocks and underweight positions in financial stocks both added value during the month. In terms of specific stocks, Manulife Finanical (up 19.5% on the month), Suncor Energy (up 10.8%), Quadra FNX Mining (up 18.2%), Thompson Creek Metals (up 16.8%) and Gold Wheaton (up 14.7% on buyout offer from Franco-Nevada Mining) were the biggest contributors to the December advance in your portfolio. Uranium Participation (down 4.5%) and Research in Motion (down 8.2%) were the biggest drags on the portfolio last month.
North American Growth Fund – Review and Strategy
The return for the NexGen North American Growth Fund was strong again in December and well ahead of the benchmark for the Fund (50% S&P/TSX Composite Index/50% S&P500 Index in Canadian dollars). The Fund was also well ahead of this benchmark measure for the 4th quarter and full-year periods. The strategy has remained consistent throughout this year with an emphasis on the Canadian resource sector and an underweight in US consumer stocks. Cash has been at minimal levels for most of the year.
As of December 31st, cash in the Fund was 6.7% with Canadian stocks at 57.8%, well above the 50% benchmark for the Fund. Key sector positions included Energy, Basic Materials and Technology. Key portfolio names in the Energy sector include Athabaska Oil, Talisman Energy, Petrobank Energy, Suncor and Uranium Participation. In the Basic Materials sector, the largest holdings include Barrick Gold, Kinross Gold, Thompson Creek Metals and Yamana. Other significant holdings include Canadian Tire and Research in Motion as well as Sun Life and TD Bank in the Financials.
US stocks remain below their benchmark weight of 50% with a month end level of 35.4 % of the portfolio. The focus within the US stocks remains on multinational companies with strong export businesses and a focus on the business market, rather than the consumer. Key stocks include the newly-issued General Motors, General Electric, Exxon Mobil, Freeport-McMoran and Cliffs Natural Resources. The Fund also has large positions in Bank of America and JP Morgan in the Financials and Hewlett-Packard, Microsoft, Intel, Cisco, Apple and IBM in the Technology sector.
Financial Markets: Monthly Review and Outlook
Stocks carried the momentum from the rally that started in August right into the end of 2010 as improving economic data, strong earnings growth, increased corporate activity and falling bond prices all motivated investors who were either out of the stock market or holding too many bonds to shift funds into the equities on a more upbeat outlook for 2011. In Canada, the S&P/TSX Composite Index followed up the 3rd quarter gain of 10.2% with a 4th quarter increase of 9.5% to push the index to an annual return of 17.6%. This followed the 35.0% return generated by the index in 2009. The strength in the 4th quarter of 2010 followed the pattern of the entire 2-year rally with the resource sectors leading the advance. The Basic Materials lead the 4th quarter advancers with a gain of 14.1%, despite a lack of help from the gold stocks which only advanced 5.0% for the quarter. Energy stocks were a close 2nd for the quarter with a gain of 13.5% while Financials lagged with a gain of only 4.0% and the Telecom sector fell by 1.1%. It was the same story for the annual returns where the largest positive impact on the index was the 35.8% gain for the Basic Materials sector. The Consumer Discretionary and Health Care sectors were the only other ones to beat the index last year, and that was driven primarily by the performance of 2 stocks, Magna in the Consumer group and Biovail (now Valeant Pharmaceutical) in Health Care. Laggard groups in 2010 included Financials, Energy and Technology with gains, respectively, of 4.4%, 8.7% and 4.7%. Interesting as well was the difference in returns for the smaller stocks versus the large cap group. The TSX60, which is made up of the largest 60 stocks in the index including all the major banks, the larger energy companies and RIM, gained just 10.9% in 2010 while the TSX Completion Index (total index less the TSX60) gained 26.5% for the year! Clearly good stock selection was able to deliver superior investment results for the year. When we looked at our strongest gainers for the past year they were almost all smaller names, including Grand Cache Coal (up 106%), Uranium One (up 75%), Farallon Mining (up 45%), Magna International (up 44%) and Gold Wheaton (up 43%). Laggards in 2010 included the larger financial names (Royal Bank down 7.5% and Manulife down 11.3%) and RIM (down 18%).
Outside of Canada the rally continued as well, leading to strong annual gains for most global stock markets. In the US, the S&P500 saw almost all of its gains come in the 4th quarter with an advance of 10.2%, which lead to an annual gain of 12.8%. Strength in US technology stocks (particularly Apple and Google) helped push the Nasdaq Index to a 16.9% annual gain. The MSCI World Index gained 9.6% in 2010, driven in large part by the 4th quarter gain of 8.6%. Germany lead the European markets with a gain of 16.1% in 2010 as that economy benefited from weakness in the Euro currency and strength in the manufacturing sector. Emerging Markets as a group were also strong last year with the MSCI index up 16.4%. A notable exception to the global stock market gains was in China, where the Shanghai index fell by 14.5% in 2010, despite the fact that China was probably the biggest source of economic strength in the global economy and clearly the leader in driving the strength in the Basic Materials (commodity) sector.
While stocks were rallying into year-end, bonds were headed in the other direction despite the best efforts of the US Federal Reserve to add support to long-term Treasury prices by the announcement in early November that they would be buying over US$600 billion worth of Treasury securities over a six-month time frame (the much bally-hoed “QE2” program). Bond prices were also hurt by more indicators of economic strength coming in North America and Europe, which had been laggards thus far in the recovery. This is one of the key themes we have focused on for our outlook in 2011. Although we remain positive on the outlook for global economic growth as well as global stock markets in general, we believe that the nature of this advance will be changing somewhat. The Emerging Markets of the world had been the stalwarts of growth following the collapse in 2008 as their lighter government and consumer debt burdens and inherent secular shift into industrial versus agricultural economies. China had been the leader over the past two years with the real annual growth rate surpassing12% early last year. But as we enter 2011, the spread between economic growth rates in the US and Emerging markets will narrow, with US growth picking up and China in particular slowing down a bit. This will still push global growth higher but it won’t be as strongly focused on the commodity sectors that generally gain when Emerging economies dominate global growth. We expect that consumer goods and services, technology, autos and even housing will start to grow again this year but that it will be tougher on the commodity trade, which suddenly won’t be the ‘only game in town.’
One of the big reasons why we see a stronger recovery taking hold in the US is that there are two big sectors that have effectively been ‘running at zero’ but which are now starting to show some signs of recovery. For both of these sectors, just a return to ‘trend’ growth will lead to some huge gains. The first is autos. The US industry is clawing its way back from selling 8-9 million units of production to 11-12 million annually. But 10 million to 12 million units, against a fleet of 220 million units, just barely replaces the autos that are literally dying each year. So there has really been no discretionary spending there. Housing, which has yet to show any recovery, is in a similar condition. Housing starts are running at 500,000 to 600,000 units a year. The ongoing trend demand in housing is roughly 1.4 million units a year; that’s a combination of household formation growth of 1.1 million, and 300,000 houses fall down each year. So, again, the US has been under-producing and living off excess inventory, but that can only go on so long.
Tags: 4th Quarter, Asset Mix, Benchmark Performance, Canadian Market, Canadian Stocks, China, Commodities, Commodity Stocks, Currency, Domestic Stock, Economic Developments, Emerging Economies, Emerging Markets, energy, Financial Sectors, Fixed Income, Global Economic Growth, Gold, Performance Measure, Rail Technology, Relative Performance, Sector Rotation, Stock Sectors, Stock Selection, Volume Growth, Zechner
Posted in Canadian Market, Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off
Sunday, March 21st, 2010
This article is a guest contribution by Richard Shaw, QVM Group.
In market comments (03/11/2010), David Rosenberg of Gluskin Sheff, said.
“When we look at the last 12 years, dating back to LTCM and the bailout that ensued, we have endured a 60% rally, followed by a 50% selloff, followed by a 100% rally, followed by a 60% selloff, followed by a 70% rally. … this is a great case for active portfolio management, also a lesson that investors will not lose out by going long after a 50% collapse from the high; nor are they likely to feel much pain from selling into a 70% rally from the low. ….”
He supported that statement with this chart:
click image to enlarge
Virtually everybody knows that the return on S&P 500 has been pretty much flat for the past 10-12 years, however hiding in money market funds is not a good long-term solution, and neither is an all bond portfolio (unless you are in a very late stage of life).
He did not detail what he meant by “active management”, but it is somewhat clear that he did not mean active stock selection or sector rotation. He meant owning stocks when they are rising and not owning them when they are falling — either by switching the intended stock allocation to bonds or by holding near-cash when the stocks are falling (unless you are a trend follower with shorts).
Some would call that “market timing”, which is a pejorative label in many people’s minds, but when extended periods of many months or a few years is the interval between being IN or being OUT, we think “trend following” is a more accurate label.
Sitting around all day trying to scalp a few ticks or a few points as a day trader, is playing in the realm of nearly random price gyrations. Making decisions about intermediate and long-term trends and positioning accordingly (either In or Out, or Long or Short) is outside of he realm of random price gyrations, as these two 20-year S&P 500 monthly charts illustrate (a Bricks chart and a Simple Moving Average Cross-Over chart):
Brick Chart (time independent)
Moving Average Cross-Over Chart (time dependent)
Three Primary Asset Categories:
The biggest issue is not whether you have the right choice of funds or stocks, but whether you have the right mix of the three basic asset types “Loans”, “Ownership” or “Reserves”.
For some, rebalancing between the three categories within a fixed or collared allocation range will probably work; and for some others moving the Loan or Ownership assets into and out of risk with Reserves as default will likely work too; as this chart of the Dow Jones Corporate Bonds Total Return index and the Dow Jones Composite (stock) Total Return index suggest (stocks in black and bonds in red):
This Dow Jones US Asset Allocation chart also suggests the value of rebalancing, and perhaps of moving into and out of key asset categories on a major trend reversal basis (chart shows five stock/bond allocations labeled for the percent of stocks in the mix: 100, 80, 60, 40, and 20):
Relevant Securities:
Stock ETFs that related closely to these charts are SPY, IVV, VTI, IWB and IWV. Bond ETFs that relate closely to these charts are BND, AGG, and LAG.
Summary:
In the current and recent stock market environment, a straight Buy & Hold strategy is too risky for those investors who have essentially completed the accumulation stage of life and who cannot replace major asset losses that may persist for years, or for those who are or are about to rely on their assets to support lifestyle. Some kind of dynamic movement into and out of, or between, the three major asset types is a potentially effective risk moderating approach.
Holdings Disclosure:
As of March 11, 2010, we hold SPY and BND in some, but not all managed accounts, We do not have current positions in any other securities discussed in this document in any managed account.
Disclaimer:
Opinions expressed in this material and our disclosed positions are as of March 11, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.
Richard Shaw
QVM Group LLC
Tags: Active Management, Active Portfolio, Active Stock, Asset Allocation, Bond Portfolio, BRIC, BRICs, David Rosenberg, Day Trader, ETF, ETFs, Gluskin Sheff, Gyrations, Long Term Solution, Market Comments, Money Market Funds, Pejorative Label, Qvm, Richard Shaw, S Market, Sector Rotation, Selloff, Stage Of Life, Stock Allocation, Stock Selection, Trend Follower
Posted in Emerging Markets, ETFs, Markets | Comments Off
