I believe that the US indices may stage a correction or pullback in the coming months.
I have mentioned this in recent blogs: Things have changed for the markets. The current environment is not ideal for buy n’ hold investors. Over the past 5 years, buy n’ hold worked very well. It hasn’t worked as well in the past 6 months. Sector rotation has created a more volatile investment climate. That isn’t conducive to a good return in a steady buy n hold index strategy.
Since the Trump election 2017, investors have been taught that buying and holding index stocks, or the top names in the US indices (specifically the FAANG & technology names) was all you needed to do. In an environment of little sector rotation, any fool could become a successful investor. Buy an index. Or buy the FAANGs (and related tech names). Bob’s your uncle (as the British say)- you’re all set, nothing much else to do. Much banter around “couch potato portfolio management” coincided with the easy returns on index ETF’s.
In the fall of 2020, we began to see early signs of sector rotation. The FAANGs and other tech names largely began to trade sideways. Value began to break out of a base. Reflation stocks started to catch a bid. I gave readers a heads up to these rotations through the late summer and early fall.
Now, we are starting to witness another rotation. You read it here first. About a month ago I noted that the best values out there were in consumer staples, utilities and communications stocks. Were you paying attention? Check out any of my blogs or my videos to verify that statement. Here we are a month later, and that sector rotation outlook is looking to be another correct call. The chart below is a sector performance bar chart available from stockcharts.com. I set the timeframe to 22 days, which happens to be the approximate number of trading days over the past 30 days (30 – 8 weekend days). You will note on the chart that:
- Technology (blue) and consumer discretionary (pink) – the former leaders, are now lagging the S&P 500 the most
- Consumer staples (purple), utilities (red) and communication stocks (bright green) are now outperforming the S&P 500 the most. These, along with industrials (bright blue), which continue to outperform (much of the value stock names came from the industrial sector)
So, the new sectors that will, in my opinion, outperform the markets for the coming months are staples, utilities and communications. This might makes sense. Here’s why:
Lets face it – markets indices are pretty overbought. That’s because the leading overweight sectors in the SPX and NAZDAQ such as technology, and consumer discretionary stocks are overbought. I believe that these indices may stage a correction or pullback in the coming months. But, as I have harped on in the past – this market is a “barbell” market with too much weight on the one side of the barbell. It is those sectors that are overbought that will feel the brunt of that correction.
Herein lies the opportunity: I believe that, due to low interest rates and plenty of money supply, money will stay in equities. But it will continuously rotate into the areas market players foresee as the next move. I believe market players are just now waking up to my call for a value play in the three sectors mentioned. Staples, utilities, communications. Call it a flight to safety. Call it a rotation to value. Call Bob, your uncle. I don’t care. At ValueTrend, we began to ease into these sectors a month ago. We anticipate more such moves in the coming weeks. Perhaps you should too.
Do yourself a favor
If you or your family are not taking advantage of the rotations of todays markets, do yourself a favor: Contact us by email, or telephone here
We’ll be happy to set up a phone conference or Zoom meeting to explain how we can manage your money as prudently and conservatively as we all of our clients. There’s no obligation or pressure when you reach out to us. It’s a friendly conversation with Keith & Craig, where you’ll get straight answers without the sales-pitch! We look after family investments – including RRSP, TFSA, Corporate and Personal Investment Accounts. If you hold around $500k or higher and feel you need a second opinion on your portfolio, give us a call!