Over the last few years, it’s been fairly easy to make a macro call on the markets – “Dollar is trash. Buy Gold. Don’t own Financials. Own Financials. Buy a home because real estate never goes down. Sell your home and get out now while you still can. Bonds are the next bubble. Europe is going to collapse. China will have a hard landing. Buy the Transports.” The macro calls have been abundant over the past few years. Many egos have been inflated and deflated based on some of them. Few managers and investors are able to adjust when times change because they’ve staked their egos on being “right” instead of being in the “right areas”. “If it hasn’t happened now, it will in the second half.” Beware comments like, “eventually I’ll be right.”
I believe that the main problems are: 1) the idea that you have to get the macro call right, 2) there can be only one macro call, and 3) the stock market is monolithic.
The Right Macro Call
Whether it’s precious metal stocks, financials, or auto part suppliers, there is a prevalent idea that one needs to put all their eggs in one basket. This is akin to gambling at cards. Eventually, with a little statistical luck you can strike it big, but will you know when to leave the table? How do you know when the fundamentals have changed? Usually they change well after an investment has hit its peak valuation.
There Can Be Only One (Macro)!
When investors and managers stake their reputation on one macro call, they likely avoid looking at other areas of the market – missing turns as they develop. Investors and managers can fall into this problem not only between sectors in the market, different world markets, but also different asset classes. I can remember between 2003 and 2004 how many clients came to us because their broker or brokerage houses didn’t allow any allocation to precious metals. Commodities were “too risky” and then analysis came out that diversifying across stocks, bonds, AND commodities helped to lower risk – strange how that works after a bull market in commodities. Never limit your choices. Narrow them down to the ones that make the most sense to you, but never make never statements (i.e. I’ll never own tech!).
The Stock Market is Monolithic
There’s a notion that you have to be either a bear or a bull on the market. Therefore, you either own the market, or you’re in cash/short. It’s not a stock market, it’s a market of stocks. 77% of the 500 S&P stocks are trading above their 50-day moving average. A couple of weeks ago, it was only around 30%. My guess is the 30% that were still above the moving average a couple of weeks ago are likely in very good shape now that the market has lifted — maybe even at 52-week highs. Even here, 23% of the stocks in the S&P 500 or more are in their own private little bear markets. Stock selection or sector weighting is important, and it’s the only way to “beat” the market (S&P 500, Dow Industrials, etc.). Unfortunately, it’s also the only way to underperform against the market. Instead of making a macro call — and I have done those at times because of clear, long-term fundamental reasons — let’s just follow and trust the charts. We all like to own things that go up, right? And avoid things that go down. Here is my review of industry group ETFs and which are leading the stock market, and which are a drag. There have been a few notable changes recently that you might not be aware of.
As a side technical note here, I like to use both the real price charts as well as relative strength charts that compare the industry group against the S&P 500. A rising relative strength chart tells me that the group is leading the market and I want to be over weighted that group. A falling relative strength chart tells me I want to be under weighted for that group.
The Pharmaceuticals S&P SPDR is up 32.64% ytd. It has performed very nicely versus the S&P 500 over the last two months especially, but it may be due for a breather. A lot of the action has been due to some M&A activity.
The Biotech industry group is up 31.69% ytd, but what’s interesting here is that the group just began to reaccelerate versus the market in the last couple of weeks and has broken out of a key relative strength resistance zone. Bottom line, this group is demanding some extra attention on your stock screening activities.
The Retail S&P SPDR is up 29.58% ytd. I guess the Fiscal Cliff was just a hill after all. Here we see that the group has had a fairly good run since January and I’d be hesitant to do any buying here in general. Wait for a pullback but it is a group that has been in play for more than just a couple of years. There is a bullish long-term trend in retail.
As I highlighted last October (see article), it did not appear that transports were signalling an end to the ongoing bull market and would likely head higher. This certainly held true, but since March we now see that the group in general has traded with the market’s performance.
Insurance S&P SPDR is up 27.66% ytd and has been consolidating since March, but it shows no sign of a top. This group has been a performer since 2011 and continues to be in a long-term uptrend. Recently, performance seems to be resuming for the group and a mini breakout has occurred in the relative strength chart.
Regional Bank S&P SPDR is up 25.74% ytd and the group had a major breakout in performance in the month of June. Many individual charts I follow have broken out of 2 to 3-year bases. This week, it appears the financial sector is extended and profits were taken yesterday ahead of JP Morgan, Wells Fargo, and Webster Financial’s earnings. Watch for a retest of the 2-year breakout and if prices respect the new level of support, watch for the group to continue to be a new leader in the market.
The Homebuilders S&P SPDR is up 17.29% and has been toppy as of late and the relative strength and absolute charts of the individual positions inside the index have broken support in 2013 due to interest rate concerns. These concerns may have been overblown because many companies are trading back inside their trading range as Federal Reserve voting members continue to pound the table since June 20th that Fed Funds Rates will remain low and accommodative well out to 2015. If the group can breakout to new 52-week highs, that would be a signal to increase exposure again. False breakdowns are bullish.
Let’s look at some long-term trends that may be changing at this moment for Technology, Telecom, and Semiconductors. The Morgan Stanley Technology Index is up 13.97% ytd, which has underperformed the S&P 500. The long-term trend has been negative for the group for two years, but that may be changing. Note that the corrections in April and October last year failed to reach new relative strength lows. When an asset fails to make new lows in a clearly bearish trend channel, it’s the first warning of a possible reversal. I’m watching to see if we get a two-year breakout here in case a previously underweighted area of the market needs to be upgraded.
The Telecom S&P SPDR is up 11.24% ytd and has recently showed the same kind of market performance as the Morgan Stanley Tech Index. This too is an area of the market that was previously avoided, but is now stabilizing and warrants an upgrade.
The Semiconductor S&P SPDR is up 23.9% ytd and shows some of the best signs of reversal potential - like the regional banks. Previously an area that should have been underweighted, it deserves an upgrade.
Note that I haven’t talked about coal, gold miners, metals & mining, or energy. These are areas I have been bearish on. These areas were up big yesterday, but I believe due to short covering because the groups are oversold. I do not see the signs of a bottom forming. Bottoms take time. Moving averages need to flatten. In absolute terms, the Oil & Gas Equipment & Services S&P SPDR is in an uptrend that began mid-2012. It’s currently moving at the same approximate pace as the S&P 500 but it lacks enough oomph to be a leading sector, even at 4 oil. However, check out the recent intermediate-term buy signal in the relative strength chart for the group.
I am looking for a bounce in many of the interest-rate sensitive groups that came for sale in June and July like housing, REITS, bonds, materials, and mortgages; however, focus on the industry groups with positive relative strength charts. I believe it’s better to be invested in many favorable groups, and be diversified, than to make one giant macro call. I think if anything is clear from viewing the charts above, it’s that there are many areas of the market that are working right now.
