Market Update Webinar Rescheduled - Due to the Memorial Day holiday, next week's Market Update webinar has been rescheduled for Tuesday, May 26 at 1:00 p.m. ET. Those who have already signed up will remain registered. If you haven't already registered but would like to, click here. Reminder that the webinar will be recorded and made available to all registrants who are existing subscribers following the live presentation. 

Replay of Monday's Market Update Webinar - We now have the replay available from our Monday, May 18^th  market update webinar. Links to the video and presentation slides are provided below.

Click here to access the replay

Click here to access the slides

Beginners Series Webinar - Join us on Friday, May 22^nd at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Understanding the Asset Class Group Scores Page. Register here.

The technical stars have aligned for Dow, Inc. DOW and DuPont de Nemours Inc. DD, as each stock entered strong attribute territory earlier this week for the first time. As a reminder, a “strong attribute” stock is one that has at least 3 of the 5 total attributes possible in its favor. For a study on the quantitative benefits of owning strong attribute stocks, see our technical attribute research paper here.

DowDupont, a culmination of Dow Chemical and the 217-year old El du Pont de Nemours, separated its business into three distinct chemical companies last year. For those curious about the distinction, according to Barron’s: Dow focuses on commodity chemical production, DuPont on specialty chemical production, and Corteva on agricultural chemicals (Source: Barron’s.com). Since the breakup, the stock market has been generally unkind to the new shares. Dow, Inc. DOW (a member of the Dow Jones Industrial Average DJIA), DuPont de Nemours Inc. DD, and Corteva Inc. CTVA generally trended lower in 2019 and throughout the first quarter of 2020, dampening current year-to-date return figures of -33.89%, -23.88%, and -15.12% for the three companies, respectively (through 5/20). That said, since posting a bottom at the end of March, shares of DOW and DD have gained notable momentum, most recently breaking through their respective bearish resistance lines to reach strong attribute territory earlier this week on May 18th. 

As for DOW and DD, this is the first time the two entities have possessed strong technical attribute ratings at the same time, and more interestingly, the deciding event occurred on the very same day. DOW currently trades on a Point & Figure buy signal, in a positive trend, and is testing resistance at the $38 level and has initial support available at $31 which is also where the bullish support line currently lies. DD also trades on a Point & Figure buy signal, in a positive trend, and sits against resistance at $49 and has initial support available at $42. To monitor for further improvements in the technical attribute ratings for each stock, make sure to click the “Set Activity Alert” button and toggle on “Positive Attribute Changes” at the bottom of the list.

*For those reviewing the relative strength (RS) sections for DOW, DD, or CTVA and noticing the asterisk to the right of a signal, this is telling us that there is not yet enough chart information to determine a “true” signal. A “true” signal is defined as a column of Xs or Os advancing higher or lower, respectively, than the previous column and requires at least 3 columns to determine. For that matter, such will not count in favor of a security’s technical attribute rating until a “true” signal is given. Note this can be a common finding with newly traded names.

We have previously talked about the ongoing debate regarding active vs. passive management. Proponents of passive management insist that active managers cannot consistently outperform a passive benchmark and therefore investors are better off to invest in lower cost index funds. Meanwhile, those in the active camp maintain that through their analysis and expertise active managers are able to produce persistent alpha. The question of active vs. passive is often framed with the premise that active or passive is always superior and focuses largely on the U.S. equity market. However, all markets are not the same and so we should examine the merits of each style on a market-by-market basis instead of taking a one-size-fits-all approach.

The key determinate of which strategy, active or passive, is superior is market efficiency. Market efficiency describes the degree to which asset prices quickly and rationally adjust to reflect new information. In a highly-efficient market, any new information is quickly incorporated into prices and therefore it is not possible to consistently achieve above average risk-adjusted returns in this type of market. Therefore, due to their lower cost, passive investment strategies are favored over active management in a highly-efficient market. In less efficient markets, on the other hand, the opportunity exists for skilled active managers to outperform passive strategies, thereby adding value for clients.

As mentioned above, the active vs. passive debate often examines only large cap U.S. equities, which is a natural starting point for the discussion – the large cap U.S. equity market is composed of the most well-known companies in the world and represents a large portion of many retirement portfolios. However, if we stop there we ignore what should be an obvious and fundamental element of the discussion – the various markets around the globe are unlikely to all be equally efficient. The very fact that that U.S. large cap companies are the most visible and researched firms in the world suggests that the U.S. large cap equity market is likely to be more efficient than its less-well-known counterparts!

In addition to variation across markets, individual markets can also have different characteristics in distinct time periods. During the 10-year bull market from 2009 – 2019 active managers, especially in the U.S. large cap space, often struggled to match the performance of their benchmarks. One common refrain from the active camp during that time period was that active managers were skilled at identifying quality and outperformed in down/volatile markets. As measured by the VIX, March was the most volatile month on record, so with that in mind we wanted to see how things shook out.

Below we've looked at the rankings of passive benchmark-tracking ETFs across five markets, U.S. large cap, U.S. small cap, international developed, emerging markets, and domestic fixed income. The graphs break each universe down into quartiles. If the passive fund is in the top two quartiles, that means that it outperformed the majority of managers in that market. We are primarily concerned with the two left-most bars in each image which display the rankings for the month of March and for the entire first quarter.

As you can see, between the domestic equity markets, active managers appear to have done best in the small cap space as the Russell 2000 Index Fund ranks right around the 50th percentile for both March and 1Q20, meaning that about half of active managers outperformed the passive benchmark. In the large cap space, the SPDR S&P 500 ETF SPY ranked within the top half of the universe in both March and Q1, meaning that less than half of the active managers in the space outperformed it.

In both the international and emerging market equity markets our passive funds ranked well above the median for both March and 1Q20 as a whole. The recent underperformance of active in these spaces is somewhat surprising, as we can also see that the passive funds fall in the bottom half of the rankings over the longer time periods displayed.

Clearly market volatility was not helpful to active US fixed income managers in this case. The passive index ranks in the bottom two quartiles over the longer time periods, but was well within the top quartile in March and Q1. Overall, the assertion that active management outperforms during down/volatile markets does not appear to have held true in this case as the passive funds did not rank in the bottom half for either the month of March or 1Q20 in any of the five markets we examined. Of course, one month's or one quarter's results are not enough for us to draw any sweeping conclusions, but, at least in this most recent downturn, the average active fund doesn't appear to have fared any better than the passive benchmarks. 

The past week has seen volatility in domestic equity markets continue, however, the movement has largely led to technical improvement on the individual charts of the major domestic equity indexes. One area that we have continued to focus on has been the 20-point chart of the S&P 500 Index SPX, which we saw continue higher earlier this week to move back to a positive trend at the 2960 level before pushing further to 2980 following trading Wednesday. We have seen this domestic equity improvement reflected at the top end of the Asset Class Group Scores page as well, with eight domestic equity-focused groups now scoring north of the 4.00 average score line and only three fixed income areas maintaining this higher field position. Recent strength has been especially noteworthy in the US mid-cap growth and aggressive growth groups, as we continue to see growth push higher on the heels of the US large-cap growth camp. Precious metals have also been an area of some significant improvement in recent weeks, with a specific focus on the recent rally in silver that was discussed in yesterday’s Alternative Investment Spotlight.

The “risk-on” strength that continues to be displayed at the top of the ACGS page is furthered by the continued fall of the Money Market Percentile Rank (MMPR), which has moved south to 35% following trading on Wednesday. In looking at the cash proxy used in the MMPR, we see that the US money market group has continued to show a downtick in its average score, with other areas continuing to push higher. US money market comes in at a recent score posting of 2.45, with quite a few other areas scoring just below the space. Namely, we see that the all mid-cap, growth & income, industrial, and Japan groups have each shown a near-term rise in score to be poised just beneath the US money market group. Keep an eye on these spaces for further follow through to the upside that may lead the MMPR to continue lower.

One group that still sits below money market but has perhaps surprisingly not shown improvement has been low volatility equities. This group comes in at an average score of 2.13 and a negative score direction of -1.85, further indicating its lack of near-term strength. In fact, we see through a view of the historical group score of the low volatility space that this recent posting marks the lowest score since the creation of the group in March of last year.

When we take a look underneath the hood at the funds that make up this space, we see a majority of the weaker scoring areas stemming from laggard areas such as international equities and small-caps. With that said, the large-cap focused low volatility space has not held up well compared to its broader benchmarks, with the Invesco S&P 500 Low Volatility Portfolio SPLV showing a year-to-date return of -17.72%, more than twice the decline of SPX at a return of -8.02%.

The addition of another growth-oriented factor onto the low volatility screen has played out better, as we see displayed through the First Trust Dorsey Wright Momentum & Low Volatility ETF DVOL. This fund has advanced off its recent bottom of $14.75 to give two consecutive buy signals and currently sits at a double top formation at $20. A movement to $20.50 would complete a bullish catapult pattern, furthering its improved technical picture. The 3.37 recent score posting of DVOL also bests the average low volatility fund at 2.18 as well as the average growth & income fund at 2.42. The ETF also carries a low relative-risk score of 0.93 and a yield of 1.97. The recent improvement has left initial support offered at $19.25 with further support at $19 and $18.75.

Daily Option Ideas for May 21, 2020