“Sector Rotation”

Over the past couple of weeks we have mentioned the international equity sector gaining momentum and potential portfolio changes as a result. This idea of making portfolio changes based on the change in leadership or ranking is all part of a strategy we utilize called Sector Rotation.

Sectors are specific sub-categories of a market. For example, the broad stock market can be broken down into 10 sectors such as technology, utilities, healthcare etc. . If you look at the returns for each sector over time you notice that the returns can be dramatically different from sector to sector; often having as much as an 80% difference between the top and the bottom year to year. Here is a link to Morningstar’s Sector Returns page.

The term Sector Rotation strategy in non-market-jargon could simply be “category change” strategy. By ranking the various sectors (or categories) in any given market and monitoring it over time, you can clearly see those that are the leaders, those that are rising and those that are falling. By employing Sector Rotation strategy we can own more of the categories that are performing well and less of those performing poorly. As the leadership changes we look to replace the categories that are falling in ranking with ones that are rising.

The theory is not too complex. Having the time, expertise and data to put it into practice is a bit more involved and not something the average investor is likely to engage on their own. As portfolio managers, employing strategies such as sector rotation is a big part of what we do for our clients.

Here are links to Investopedia’s definition of Sector Rotation.

“Patience” Making a move AFTER buy sell indicators change

In last Monday’s Weekly Wire, we talked about the rise in ranking of the international equity sector. Over the past week, we saw that momentum continue. Whether this is due to the quantitative easing overseas that we mentioned last Monday or other factors, the beauty of relative strength indicators is that the “why” something is happening is not nearly as important as the fact that it “is” happening.

Speculating on the “why”, although sometimes interesting to debate, can unfortunately lead investors into decisions based on plain old guessing. The problematic assumption with a guess is that whatever the investor is attributing the momentum to is – a) correct and b) will continue.

We follow a less emotional or gut-based decision making process, focusing on what actually has happened as the inflection point for changes to any portfolio. The key is – patience. Our indicators have to actually move from buy to sell or vice versa for us to make a change. It’s not enough to just guess that an indicator move may happen, guessing is not part of a repeatable process.

So for now, we wait. Would we be surprised if our international equity indicators move to buy signals in some portfolios? No. Are we making portfolio changes early based on a hunch? Also no, but stay tuned!

In case you missed them last week, Here are links to Investopedia’s definitions of Quantitative Easing and Relative Strength.

“International” Quantitative Easing having an effect overseas ?

For the past few years the US stock markets have been the consistent front-runners for growth investing. That said, we are seeing early signs of strength from the international markets.

In Europe, quantitative easing was announced last year, much like the US government’s quantitative easing from a several years prior which helped boost the US stock markets. The latest numbers may indicate that this action has begun to have a similar positive effect overseas.

On a relative strength basis, we are still seeing the US stock markets as the leaders with US fixed income coming in second. However, international equity markets are now third and gaining momentum. Not enough movement for any wholesale change in strategy, but another indicator that is a ping on the RADAR that we are watching closely.

Here are links to Investopedia’s definitions of Quantitative Easing and Relative Strength.

This is the first of our new Weekly Wire series.  Our clients often ask us for our take on recent events or market conditions. Weekly Wire’s are short and sweet, but we hope they will give you some insight into our thought process and spark some great questions.  Let us know what you think, we always like to hear from you!

“Exhale” Signals from an overbought market

Last week the US equity markets pulled back a little. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index each fell every day last week before edging higher on Friday. Our short-term indicators predictably switched to sell; however, medium and long term indicators remained substantially unchanged.  Our collective take on the week was that it represented a bit of a collective exhale from an overbought market, which is not too surprising.

What this means to our clients is that the recent pullback is part of the normal ups and downs of the capital markets. Our short term indicators are not used to “time” the market with existing accounts. Rather these indicators work well in deciding when to use a dollar cost average strategy when committing new cash to invest.

Here is a link to Investopedia’s definition of overbought market

All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.