Sector rotation observations

I’ve posted commentary in prior blogs about the extreme lack of volatility on the S&P 500 since May of this year. History proves that markets will normally see the odd 5-10% correction within a healthy bull trend, as seen during post-COVID crash 2020, and earlier this year. However…Between May and August, the largest correction on the SPX was only a little over 3%. As I have been pounding the table over – this simply could not last. As such, we have been holding 17% cash within our conservative Equity Platform since August. Currently, that decision seems to have been correct. Here’s the chart illustrating the “normal” pre-May volatility vs the “abnormal” post-May volatility ending Sept 20.

One of the interesting observations of late has been the NASDAQ’s relative peak-current underperformance to the SPX (SPX down 5%, NAZ down 5.5%). That’s because it is very heavily weighted in growth stocks like technology. And those companies are often highly leveraged. Not to mentioned overvalued at this time. As we noted in the recent ValueTrend Update newsletter (if you don’t subscribe, you can do so here), markets tend to fall every time the FED hints, and/or acts on a reduction in their monetary stimulus programs. This has been the case each and every time since 2008. The NASDAQ, being filled with companies that have truly benefitted by low interest rates and the “stay inside” COVID phenomenon, is now facing the probability of higher rates, less stimulus, and more adaptation to the COVID virus.

If the rotation out of the NASDAQ continues (and it is early yet), are there clues to where the money may be going? Below is a comparative performance bar chart of the SPX sectors from May- Sept 20. I then took a look at the past 7 trading days which is roughly when the period of volatility began. There are some interesting observations to be made. First, here is the May-Sept. 20 chart:

Note that technology (pink bar), health care (orange) and real estate (green)were doing well May-Sept 20.

Now lets look at the SPX since the 20th. Note that former dogs like energy (turquois) in particular, along with materials (black), financials (light blue), consumer discretionary (dark blue) and industrials (light turquois?) are turning around. Recall that these bars are relative to the SPX. They are not absolute performance numbers.

Conclusion

Keep an eye on the turn-around sectors. If the NAZ is to keep underperforming, you want to rotate into sectors that are just now catching a bid. For our part, we did buy back some of our oil (we reduced energy back in the spring) with a neartermed trade objective.

ValueTrend supports junior cycling

For many years we have supported junior cycling. This year, we were very proud to help seed the new Toronto Hustle junior team. Hats off to Kevin Simms, who incepted the idea and pushed against all odds to incept a junior (under 19 years of age) cycling team. He managed to incept a co-operative with the very respected Toronto Hustle cycling team. Kevin’s junior team went to Europe and competed with the very best in the world. In fact, the team ended with outstanding results (podiums and top finishes) amongst the hardened  and massively competitive International racers. The European culture produces amongst the best cyclists in the world. Europe & South America breed a culture of youths hoping to make it to the pro level. But only some will survive. It was astounding how well a team from Canada, where hockey is everything – and cyclists an annoyance to many people – made such a mark in the big league.  If you have any interest in seeing our youth get involved with sport – you will love this article covering how Kevin’s dream came true. As an aside, we are also involved in sponsoring the Heathy Teens program to encourage teens to stay away from drugs, smoking and alcohol. More on that on our “About us” page.