Webinar Hosted by Advisor Perspectives - Investors Need Yield: A Distinct Nasdaq Approach for a Zero-Yield World.

Meeting cash flow needs through distributions is becoming challenging with Treasury yields at rock bottom levels and investors enduring widespread dividend cuts this year. Trying to generate a meaningful yield often means unacceptable credit risk at a time when the bankruptcies are just starting to get announced following months of government-mandated shutdowns. For investors looking to fund their day-to-day lives, a better approach may be to focus on maximizing risk-adjusted returns and manufacturing a distribution to meet individual cash flow needs while managing risk and return. Target distribution strategies seek to leverage a modern portfolio theory approach focused on risk-adjusted returns to deliver steady cash flow to investors while maintaining the principal over the long-run. The webinar is scheduled for Thursday, November 12 @ 2pm EST.

Copy and paste the link below into your browser to register for the event:

event.on24.com/eventRegistration/EventLobbyServlet?target=reg20.jsp&referrer=&eventid=2800102&sessionid=1&key=F1823053F079D5EEA091B087B4A09B88&regTag=&sourcepage=register

Beginners Series Webinar: Join us on Friday, November 6^th, at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Navigating a Point & Figure Chart Page.

Copy and paste the link below into your browser to register for the series:

nasdaq.zoom.us/webinar/register/7915519908388/WN_go_ZASGiSI6Qc5a7mmx7XA

The year 2020 is one for the books, no questions on that. However, many questions do remain about who the next President of the United States will be. As loudly conveyed the pollsters got it wrong this time, but the stock market still has a chance. In a year where precedent and normalcy seem to be long gone, we look to one of the last market adages for some guidance in the uncertain political climate.

Stock market returns leading up to a US Presidential Election historically produce a rather accurate signal of which party will win. If looking at the S&P 500 Index (S&P 90 prior to the election of 1960) price returns 91 days out from an election, we find that a positive/negative market return indicated the winning party 87% of the time, or 20 out of the 23 past elections. A negative return suggesting a change of party, while a positive return indicating the incumbent party being reelected. Since 1984, the indicator has been 100% accurate.

However, as displayed above, in 2020 we recorded the S&P 500 with a razor-thin return of 0.11% 91 days prior to the election, the smallest of gains in our study. As perhaps deduced, if the incumbent party is not reelected in 2020, this would mark the indicator’s first miss in over 35 years (about 9 elections). 

As we have been discussing in the report for the last few days, we have officially entered the "seasonally strong" six-month period for the market and we have published a handful of articles around “market seasonality” and strategies that can be used to leverage this historical bias. Looking at the historical returns, there is no question that the November to May period, which we’ve just entered, has provided substantially better returns over time than the six month period from May through October. Whether you average it, annualize it, compound it, or complicate it further, there exists a wide performance spread between the average six-month returns of each holding period. We could hardly hope to explain this bias, much less the severity over time, but suffice it to say the "strong six-months" of the year have accounted for nearly all of the Dow's average annual compounded return since 1950. The average annualized return of the Dow during the seasonally strong six-months is close to 7%, while the "other" six months have produced an annualized return of less than one percent based upon an initial investment in 1950.

Those of you who have been following our research for any length of time know that sector rotation is a key aspect of many of our strategies. So, a natural extension of our market seasonality research is to examine how individual sectors are affected by the seasonality phenomenon. While we don't have the same longevity in terms of data for sectors as we do for broad market indices, we have observed performance biases within the past 20+ years, which we illustrate below using the 40 DWA equal-weighted sector indices.

Let's first look back at the six months ending October 30, 2020, during which the Dow Jones Industrial Average DJIA, posted a gain of 8.86% outperforming its median return of 5.88% during the seasonally strong period as well as the median return of 2.22% for the seasonally weak period. The best-performing sector was the gaming group DWAGAME, which was up a whopping 55.83%. Meanwhile, oil DWAOIL was the worst-performing sector, down -17.20%, which comes on the heels of seasonally strong period (Nov ’19 through April ’20) during which it was down more than 45%. .

This graphic above utilizes our inventory of 40 DWA equal-weighted sector indices, which have been "live" for the duration of our study period (most have been published since 1998), as well as a handful of benchmarks tracking equity and bond markets. Combined with a second image below, the study includes market data from April 28, 2000, through October 30, 2020, tracking the returns of each index within the seasonal ranges defined by traditional studies (the weak period spans May 1 through October 31, while strong periods span November 1 through April 30 of the following year). The results are illustrated through graphs sorted by the "median" return of each index during each seasonal side of the study period, as well as the "min" and "max" return periods.

In terms of median return, oil index ranks at or near the bottom in both the seasonally strong and weak periods, which is at least partially attributable to the dismal run that energy companies have had over the last few years. Steel DWASTEE and semiconductors DWASEMI, are near the top of the pack during the strong period, however, both rank in the bottom three during the weak six-month period.

The overriding observation is that the seasonal bias of market returns is not limited to cap-weighted indices such as the S&P 500 Index SPX or blue-chip indices such as the Dow Jones Industrial Average DJIA All 40 DWA groups have positive median returns in the seasonally strong six months of the year during our study period, which now includes three significant bear markets. As shown below, many sectors tend to experience losses during the seasonally weak six months of the year, with semiconductors, steel, and oil services producing the worst median returns over the study period. In contrast, the internet, software, and waste sectors have historically produced the best median returns of the 40 sectors during the seasonally weak period.

The beginning of this week brought about the market seasonality shift, as we have covered throughout the Daily Equity Report over the past few days. This shift occurs as we enter the “seasonally strong” market period, which begins in November and runs through April. The “seasonally weak” period for domestic equity markets begins in May and runs through October, giving us the market adage of “sell in May and go away.” While we have a variety of models that focus on changing allocation at these two points specifically, the market seasonality shift also brings about evaluations to the Fund Score Method (FSM) models that are evaluated at each seasonal quarter, taking place at the beginning of February, May, August, and November. Note that the FSM models are only available to users that subscribe to the Enhanced Security Selection (ESS) package. In order to take a free trial of the ESS package, please reach out to our sales team at (212) 312 - 0333.

These latest evaluations saw trades in many of the models, as the continued upside we have seen from domestic equity markets over the past few months led to higher scores from risk-on areas in the model inventories. Today, we will review recent additions to the FSM American Funds 5S PR4050, FSM Vanguard 5S PR4050, and FSM T Rowe Price 5S PR4050 models in light of the recent evaluations.

The American Funds 5S and Vanguard 5S models each sold their last bond fund that remained from the COVID-induced market volatility, making each model fully focused on equity exposure. Interestingly enough, we saw the American Funds model purchase the American Funds Europacific Growth fund AEPGX, as the next highest scoring fund that the model did not already own. This is the first time the American Funds lineup has had an international specific fund included as a model holding since February of 2018.

The Vanguard model saw the Vanguard Diversified Equity fund VDEQX move in as a model holding, rounding out the other equity growth-focused funds that were already included in the model holdings. This model had already purchased a foreign equity fund in the Vanguard International Growth fund VWIGX at the last evaluation in August, giving it a similar makeup to the American Funds lineup from a broad perspective through an overweight toward domestic growth with international inclusion. Another notable point is that the typically more risk-averse American Funds actually has a higher allocation to international equity areas with the other model holdings.

The largest change of the three models we will examine today came in the FSM T Rowe Price 5S PR4050 model, which saw three new funds added to the model holdings. This included the T Rowe Price Japan fund PRJPX, T Rowe Price Global Technology fund PRGTX, and the T Rowe Price Science & Tech. fund PRSCX. Each of the five funds now held in the model has at least partial exposure toward international equities. This leaves the model with about even exposure between US equities and non-US equities, which have allocations of 45% and 43%, respectively.

While the influx of international equity into these FSM models may seem surprising, a closer look at the Asset Class Group Scores rankings may help these moves make more sense. In looking at the US & non-US view filters together, we can see that the top end of the rankings still has more domestic representatives than international, but the international camp has improved drastically over the past few months. China, the largest single country represented across most emerging market-specific and international growth funds, recently overtook the S&P 500 Index Funds group, our core equity market representative, with a group score of 4.76 compared to 4.71. Although both of these groups have maintained relatively high score positions since June of this year, the China group has been unable to hold a higher position than the core US group for more than a few days at a time. This relationship will certainly be worth monitoring for further improvement from the leader among international equity markets.

Daily Option Ideas for November 5, 2020