Replay for FSM Models Webinar: We have a replay available for our latest webinar on Applying the Fund Score Method through FSM Models, which took place on Thursday, May 21^st. This webinar featured an overview of the various FSM strategies and offered potential implementation ideas. Click here to view the replay.

Market Webinar Replay: We also have a video replay and slides available from our lastest Market Update Webinar from Tuesday, May 26^th:

• Video replay found here
• Slides found here

Beginners Series Webinar - Join us on Friday, May 29^th at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Individual Stock Idea Generation. Register here.

Since broad domestic equity indices posted a bottom on March 23rd, they have not looked back. In fact, the S&P 500 SPX, Nasdaq Composite NASD, and Dow Jones Industrial Average DJIA have each rebounded with price returns in excess of 30% (data beginning 3/23/20 through 5/27/20). As a result of this upward movement a number of indicators on the Nasdaq Dorsey Wright research platform have turned positive, yet perhaps none more so than the ten-week for the S&P 500 TWSPX. As a refresher, TWSPX measures the percentage of stocks in the S&P 500 that are currently trading above their 10-week (50 day) moving average. With an intraday calculation of 95.64% on Thursday (5/28) TWSPX posted its highest reading ever, signifying that over 95% of securities in the S&P 500 are trading above their 10-week moving average. While this may sound ominous to some, the data suggests otherwise as we note generally positive returns following TWSPX movements above the 90% threshold, with almost all observations rolling positive within nine months. 

In a similar vein, when first highlighted several weeks ago as a developing story, SPX managed to get 10% above its 50-day moving average yesterday (5/27). This event is also rare, only occurring six times since 1955 (April 2009, November 1998, February 1991, September 1982, January 1975, and July 1955). Respective performance for the S&P 500 (as perhaps anticipated at this point) is also positive, with all returns in the black six months out. 

While the events surrounding TWSPX and the 50-day moving average for the S&P 500 are certainly promising, they are not a silver bullet nor a guarantee of the past repeating itself. It is also worth noticing that events like these are infrequent, resulting in a small sample size to build from. However, the findings here do evidence that demand continues to reenter the equity markets, positively contributing to the weight of the evidence. 

Although summer doesn’t officially begin for three more weeks, many Americans recognize Memorial Day as the unofficial start of the season. While this summer is likely to be far from normal, we typically associate the season with warm weather, beach vacations, and longer days; however, in the investment world, the summer months are associated with lackluster returns, also known as the "Summertime Blues." This year, we enter the summer months coming off one of the most volatile starts to a year ever. However, the major indices have rebounded strongly off their March bottoms with the S&P 500 SPX and DOW DJIA now down -6.03% and -10.48% for the year, respectively (through 5/27). Meanwhile, the Nasdaq NASD is actually in positive territory for the year with a return of 4.9%. While the Bullish Percent for the NYSE BPNYSE currently sits in Xs, domestic equities currently rank third in the DALI asset class rankings as we head into the historically sluggish summer months. Of course, there is no way to know how the next three months will unfold, especially given the uncertainty around COVID-19 and the reopening of maxim of the Summertime Blues came to be.

The table below shows the returns of both the Dow Jones Industrial Average and the S&P 500 during the summer months (May 31st to August 31st) back to 1981. The S&P 500 and the Dow Jones Industrial Average have each finished in negative territory in 15 of the past 39 summers (or about 38.5% of the time). Of those 15 down summers, there were 13 summers in which SPX and DJIA were both down at the same time. While less than half of the summers have been negative for these benchmarks, the bad summers were indeed bad, with some down double digits over the three-month period. For instance, in the summer of 1990, the SPX fell -10.69%. In 1998, it saw a drop of -12.24%; but the worst summer came in 2002 during the tech crash when the index declined -14.16%. During the summer of 2008, which began a famously longer slide, SPX fell -8.39%. The market has bucked the trend recently, however, as both indices have posted gains during the most recent four summers.

In an effort to determine if there is one month that tends to have an outsized effect on summer returns as a whole, we compiled a monthly summary of S&P 500 returns going back to 1958. What we found is that the summer months tend to have a lower median return than most of the other months of the year. It is actually the month of September that has historically provided the lowest median return at -0.30%, but it is followed closely by June which has a median return of just 0.05%. Notice too that the spread, i.e. the max return in a given month versus the minimum return in a given month, is relatively low for the summer months (namely June and July). A closer look at the month of June reveals a max return of 6.89% in the last 60 years, which it posted last year, and also followed a May return of -6.58%. Every other month, except February, had a maximum return in excess of 8%. Clearly, June has historically been one of the weaker months for SPX returns. However, we can't blame the Summertime Blues on June alone. August has experienced the second-largest drawdown (after October) at -14.56%, which compares unfavorably to the other months' minimums which seem to hover around -10%. The data below indicates that the Summertime Blues cannot be traced back to just one month.

To take this concept one step further, we looked at four hypothetical portfolios specific to each of the four seasons. Defined as follows:

Winter Portfolio Dates: 11/30 - 2/28

Spring Portfolio Dates: 2/28 - 5/31

Summer Portfolio Dates: 5/31 - 8/31

Fall Portfolio Dates: 8/31 – 11/30

The end result? The summer portfolio greatly underperformed the other three seasons - fall, winter, and spring. If you were to invest only during the spring months (March through May), the initial investment would have had a cumulative return of 375% from 1958 through 2019, with an average annualized return of 10.58%, making it the best performing seasonal portfolio. The summer months pale in comparison to the others, gaining a measly 46% since 1958 years! That results in an average annualized rate of return of only 2.47%.

Hong Kong came to the center stage of world news late last year due to protests against mainland China after a controversial law was passed.  Hong Kong residents viewed the legislation as infringing on their rights based on the agreement of “one country two systems” after Hong Kong was handed back to China in 1997 from Great Britain. US and China tensions are beginning to boil over again with the latest development of China passing a plan to increase its security presence in Hong Kong. The US has signaled that it was likely to end some or all of the US government’s special trade and economic relations with Hong Kong due to China’s actions. The state department no longer considers Hong Kong to have significant autonomy.  The current special status allows the US dollar can be freely exchanged with the Hong Kong dollar, Hong Kong gets preferential treatment with regards to trade, and the US and Hong Kong have a visa-free travel policy. If this were to change, Hong Kong would be treated like any other Chinese city and American businesses may choose to leave due to higher costs and restricted travel. Also, Hong Kong would be subject to the same export controls over sensitive technology. The further deterioration of the US and China relationship could have serious implications on US markets as many large US companies rely heavily on China for revenue.

According to FactSet, the average company tracked in the S&P 500 has 4.19% of its revenue derived from China, and the companies tracked in the Invesco QQQ Trust QQQ have an average of 11.02% revenues derived from China. Some popular names that rely on China for revenue include Apple Inc. (AAPL) with 15.70% of its revenue from China, Starbucks (SBUX) with 14.39%, and Chevron with 26.38% amongst many others. 

In terms of sectors, some are more reliant than others on China for revenue. As seen in the tables below, some of these sectors attribute a significant portion of revenues to China.

If tensions between the US and China continue to escalate, these high revenue exposure sectors like Information Technology, Communication Services, and Consumer Discretionary could be negatively affected. Some of the larger names that have China exposure could face a damaging impact and pull these cap-weighted indices with them. The averages were given equal weights, so large names like Microsoft and Apple that derive a significant portion of revenue from China could have an even larger negative effect on the major indices than the numbers above suggest.  Regardless of weightings, the continuation of tensions between the US and China brings a large level of uncertainty to US companies that depend on China for a significant portion of their revenue stream.

(Sources: The New York Times, FactSet)

Broad domestic equity markets have continued to rally over the past week, as we can see through the S&P 500 Index funds group moving higher to possess an average score of about 4.00. This group recently moved above precious metals and a few fixed income-related areas, as the “risk-on” market environment has led to more domestic equity-related groups dominating the top end of the Asset Class Group Scores (ACGS) page. On that end, there is only one fixed income group left with a group score above 4.00, namely US Government Agency with an average score of 4.31.

The further push we have seen from the S&P 500 Index funds group has also led the US Equity Core Percentile Rank (CorePR) to cross back above the 90% threshold with a recent posting of 92.96%. As a refresher, this reading tracks the percentage of names our core equity market representative, the S&P 500 Index funds group, is beating out of all the groups we track on the system. We saw the CorePR move as low as 57% in March, after maintaining a reading north of 90% since June of 2019. This latest move to the upside marks the first time the CorePR has been above 90% since February 26^th of this year and is certainly a sign of broad strength across the large-cap space that has led the market higher after the recent drawdown.

On the other end of the group rankings, we have continued to see the US Money Market group fall in its score, with a recent posting of 2.38 leading to a Money Market Percentile Rank (MMPR) reading of 32.39%. This reading has generally been moving lower since its near-term high of 54.93% on March 23^rd; however, much of this movement can be attributed to the improvement of other groups and not necessarily the declining score of US money market. This has begun to change over the past few weeks, as the score of money market has deteriorated alongside further improvement from some laggard equity areas, specifically looking towards US Large Cap Value and US Micro Cap, which each moved above money market this past week. The combination of score deterioration with further laggard improvement has pushed the MMPR to its lowest level since March 11^th, as the reading has fallen more than 10% in May alone.

Although the MMPR has fallen significantly, it is still quite a bit above what have been “normal” levels for strong equity markets, which we see typically stay south of 20%. As we await the further decline of the MMPR, we see a number of groups that have shown near-term score improvement to sit just beneath US money market on the ACGS rankings, with a specific focus on energy-related areas such as MLPs, which possess a recent score posting of 2.34 (through 5/27). In looking at the score history of these two groups, we can see that MLPs have ranked beneath US money market since July of last year. These two areas moved quite close in score in January of this year before the enhanced market volatility drove them apart, with MLPs falling to a low score posting of only 0.20 on March 18^th, one day before money market reached its recent score high of 3.13. Given their close proximity in recent scores, we would look towards this group and others nearby as places to monitor for the further dampening of the MMPR reading.