Do you follow a Rotational Strategy?

March 12, 2021No Comments

 

Welcome to the show today. We’re going to talk about a couple of things. Probably on everybody’s lips is the rotation that recently occurred out of the NASDAQ and technology and stay-at-home growth sectors into value and reflation names. Anybody who follows my work on my blog at valuetrend.ca will know that I have been pounding the table. And I mean, pounding the table on buying value and growth. And I’ve been talking about this since June, because that’s when Craig and I at Valuetrend began moving away from technology and into these very under-loved names in the mining and eventually oil and gas and other reflation names. We bought agriculture, things like that. We also bought beaten-down stocks at the time, some of the utilities and infrastructure stocks.

These were the names that we were buying. Everybody hated them because everybody wanted to own Peloton. Everybody wanted to own Tesla. Everybody wanted to own Zoom. Everybody wanted to own Amazon. Well, those were great stocks. And I will confess for the first half of this year, we underperformed the market, but we are being vindicated. We have been outperforming the market significantly in the second half, particularly since September, our game is not all about positive alpha. We’re not trying to outperform the market all the time. Our game is about being ahead of the curve to avoid risk as our top priority. At least it is in our conservative platform. Now, we have an aggressive strategy and that platform is doing exceedingly well because we do take on the risk, but it’s been interesting to see that the value names, especially since September have actually been where the money’s gone.

So we almost are a conservative platform, which very much acts like a conservative platform and has for some 30 years of my career. The conservative platform has almost acted like a growth strategy and we’re not complaining, but it’s still following our mandate, which is to be as conservative with our structure as possible. So, I want to just bring you back in time a little bit to some of the things that we’ve looked at recently in the value versus growth area.

Now, this is the good old NASDAQ, and you can see is this was from a blog that I wrote three weeks ago. I think it was two or three weeks ago. And I basically noted that the NASDAQ from its high, which was around 14,000 or so or use round numbers, was trading at about 70% over its 200 days moving average.

That’s this red line here. I felt that the market might be NASDAQ anyways, had room to correct down as low as 12,000. Now, that’s a, that’s a good move. That’s pushing 20%. I felt you know, 17% to be exact on a downside objective. Interestingly, even though we saw a markdown on the index past couple of days, I’m recording this on the 11th of the month and in the past couple of days, the market has definitely sold off. You could see that on the short-term indicators, but they’re no longer as overbought as they were. And you can see on stochastics, NASDAQ may be setting up for this balance that we seem to be getting right now. However, the bigger term picture is MacD and you can see that crossover. And typically when you get a crossover on MacD after a significant move, like say this one or this one, you tend to get quite a pullback.

In fact, the thing I’m looking for on the NASDAQ is not necessarily a massive crash. I’m looking for a consolidation, as we’ve seen many times, as you can see on the chart, I’m kind of wiggling the mouse around the periods where we’ve seen many consolidations. So I want you to keep in mind that the tech stocks, well, not dead by any stretch they’re overdone and any rallies should be sold with both hands for the time being, because the other thing that concerns me and should concern you is the rotation into value. So here we are, and we’re looking at a chart of the iShares US value index. Now take a look at the move since February. So, this chart has moved quite strongly while you saw that the NASDAQ was pulling back.

What you’re looking at now is the growth component of the S&P 500. The other was the other chart we just looked at was a value component. It’s pulled back. Same period of time from February when the value chart. We’ll take another quick look at that again. When you bring up the indicators, there went strongly up. I mean, that’s not a small move. That’s almost parabolic at the same time the growth components have been failing. So this to me signals a change because the leading sectors, when they stop leading in a market, that can be a real sign of things to change. I want to bring you now to the blog that I wrote, and I want to indicate a chart that I borrowed from SentimenTrader.com. Now I’m a subscriber to their research, and this is one of the research pieces they sent out, so you wouldn’t be able to get this on their website.

What it’s showing you is this is the percentage of our performance by value stocks on the blue line here. And when it gets over 10%, as you can see here, you tend to get massive rotation. It’s not just a blip. It’s not just a moment in time. It’s a genuine change of sector strength. And what we’re seeing is the value stocks, typically after more than 10% outperformance by value, which is what we’ve just seen, you can get a year or two years. And in this case, this was about eight years about performance by value. And that’s where we are right now. There’s a lot of evidence to suggest that the reflation names, the value names, and by the way, this is just going back to 1990, this chart, but SentimenTrader posted the results, going back to 1900.

And there’s been eight such occasions where we’ve seen multi-year movements on value versus growth. And in fact, one of the things that you’re going to find is that because these days, the S&P 500 is so concentrated in some of these growth names that are on the NASDAQ, for example, that the S&P 500 underperforms in a big way, when this rotation is happening. Whereas what you’ll find is if we look at something like the TSX, we can see that it was only about 10% over its moving average. And look, what’s happened. This bar here is a positive bar. Why? Because TSX has a fair amount of reinflation and value names in it. The only caveat to my TSX call it. Now we are long, a lot of the TSX energy names, and we like them, and I’ve been pounding the table on that since October, we were early on that call.

We do like the TSX oil companies, but there’s other countries out there that are big into oil, Brazil, Australia, etcetera, that we should be looking at. And the reason is because there are certain forces, not of nature, but at work here in Canada that are working to suppress our oil industry. And that happens to be the federal government. And it couldn’t come at the worst time and I just don’t get the mentality behind it because when we’re looking at the profitability of a resurgence in energy demand and pricing, the last thing you want to do is squash the jobs and the GDP growth that can come out of this sector because the clean green movement is I like to call it is years away, at least a decade away from having any impact. In the meantime, we’ve got to sell something and create jobs.

So that political commentary aside, the TSX has been doing well, because at this moment, they’re able to these energy producers were able to do well as are the mining companies, which makes for a big component of the TSX.

The last thing quickly I promised you is the Dow Jones tobacco index. Now I love talking about under-loved,  politically incorrect sectors because these things are the ones that have been moving the best lately. And then look at what coal has done recently, liquid oils done, on and on. So the reason I like tobacco is, and I don’t smoke it myself, but the reason I like it as a sector because it’s setting up and this is the index.

So, I look for setups and you can read the blog for the full story, but even though there’s kind of leveled off usage in North America, there’s still growing usage in Southeast Asia. So meanwhile, the sector has been crushed, but it’s starting to, and anybody that follows my work knows I work in phases and it’s starting to putting a base and it looks like it’s trying to break out higher lows, higher highs. So that’s the index.

And then if we dig in and look at a couple of the individual plays, I’ll just see if I can flip through them. That’s the S&P, that’s the TSX, this is one that is not broken out yet, but Imperial brands, but you can see it’s trying, that’s the downtrend. It did try to break and it kind of failed. But this is Philip Morris Altria, I should say, used to be the old name Philip Morris.

You can see it as breaking out and it looks actually very, very bullish right now as does Philip Morris. So I will disclose we own Phillip Morris in our aggressive account. It is breaking out and its upside is maybe a little bit less than Altria, but it still has upside. And it is certainly positive signs on this chart. So, it’s not a recommendation to buy it.

The bottom-line message I am trying to impart to my viewers, my blog readers and our clients. We’re constantly reinforcing that this is not a stay still market. If you think that you can buy the S&P 500 or the NASDAQ index like you did a year ago, or even over the past five years and do well, I would tend to disagree with that belief.

And the reason is, is because the future, ain’t what it used to be. We’ve seen the chart of the shift from growth into value. We’ve seen what happens when this starts to occur in the SentimenTrader study. This is a multi-year transition and the problem with the indices for the most part, the S&P 500 and the NASDAQ in particular is that these indices are heavy in the very sectors that are likely to underperform.

If you’re not following a rotational strategy, then you might want to consider following one.

And if you’re not capable of following a sector rotation strategy, because there’s going to be a lot of that going on, going forward with ideas like we talked about today into tobacco and whatever, then hire somebody like us at Valuetrend because we are conservative investors. But I will say that our time of the most productive growth that we’ve had, I’ve been doing this for 32, almost 33 years. My best years have always been when things started to rotate and that’s what’s happening now. Get on it one way or the other I, or somebody that knows how to do it, or do it yourself. But you want to be a rotational investor. You do not want to be a passive index investor probably for the next number of years.

 

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