On Monday evening, it was announced that Tesla Inc. TSLA is going to join the S&P 500 index, which is set to occur prior to the market open on December 21st.  “(Tesla) will be one of the largest weight additions to the S&P 500 in the last decade, and consequently will generate one of the largest funding trades in S&P 500 history,” S&P Dow Jones Indices said.  With its market value over $400 billion, Tesla will be among the most valuable companies added to the index, and it will account for about 1% of the SPX. 

Today we wanted to examine how new additions to the S&P 500 index have historically performed leading up to and after joining the index.  On average, the new constituents underperformed the index over the one-, six-, and 12-month periods after being added to the index. While this seems counterintuitive at first when we consider the timeline of the index changes it makes more sense. Even though TSLA won’t officially join the S&P 500 until next month, we already now know that the stock will be added to the index.  This amount of lead leaves ample time for investors to front-run the index changes.  This scenario appears consistent with the results when we look at the performance of new constituents in the period leading up to the official inclusion in the index.  

In the one-month prior to joining the index, the upcoming additions had an average return of 3.3%, while the S&P 500’s average return was 0.63% over the same period. By one week out, however, the majority of any alpha-generation opportunity appears to be gone as the new constituents led the index by just 22 basis points (0.22%) on average.

So, while our results show that there does appear to be a performance advantage for stocks joining to the S&P 500, it appears to exist only prior to the official date of the addition, and for Tesla, any performance boost it will see as a result of its addition has likely already been realized.

As domestic equity continues to march higher, we have seen this improvement reflected in many of our equity-based indicators.  One of those is the ^PTSPX chart, which measures the percentage of stocks in the S&P 500 universe that are trading in a positive trend.  Earlier this month, the indicator reversed into X’s, continued higher, and hit 84% last night (11/16), the highest level since 2014.  Looking back at past occurrences, we found that there have been a handful of instances where ^PTSPX reached this level going back to 1987.  Although forward returns are typically positive, what really caught our attention is the level of reliability we’re seeing when the PTSPX reaches this level. Looking out from one week to two years, at least 70% of the time the S&P 500 index has experienced a positive gain.

Based on the dates that we identified above, we further examined the relationship between this high ^PTSPX reading and momentum returns. The first group below is the momentum spread, which looks at how RS leaders perform compared to RS laggards.  When looking out one month, the average return is more of a mixed bag; however, returns for three to 12 months out are more noticeable with the 12-month return averaging over 27%.  One thing to note is that momentum runs on confidence and it performs the best when trends are most stable. 

The next two groups we looked at based on the same dates above are high and low momentum names.  As shown below, the high momentum group over time outperforms low momentum significantly.  Not only are the returns greater, but the frequency of positive returns is more consistent.  This illustrates that investing in high momentum names stacks the odds in your favor over the long run.

• Guinness Atkinson debuts an actively managed alternative ETF.
  • The SmartETFs Sustainable Energy II ETF (SULR) is a repackaged strategy from an earlier mutual fund product offered by Guinness Atkinson.
  • SULR targets sustainable energy companies that include companies involved in generating power through any means other than fossil fuel-based energy.
  • SULR comes with a 0.79% expense ratio.

• iShares adds to its target maturity junk bond ETFs.
  • The iShares iBonds 2026 Term High Yield and Income ETF (IBHF) is iShares' sixth installment in the family spanning 2021 through 2026.
  • IBHF tracks the Bloomberg Barclays 2026 Term High Yield and Income Index which draws its components from the combined universe of the Bloomberg Barclays U.S. High Yield Index and the Bloomberg Barclays U.S. Corporate Index.
  • IBHF comes with a 0.35% expense ratio.

• Direxion releases an ETF focused on companies with the potential to disrupt the industries they operate in.
  • The Direxion Moonshot Innovators ETF (MOON) tracks an index of 50 companies and comes with an expense ratio of 0.65%.
  • The underlying index is the S&P Kensho Moonshots Index which relies on an early stage composite innovation score that includes a company’s innovation sentiment and allocation to innovation scores.
  • The index uses a modified equal weighting approach and has annual reconstitutions with semi-annual rebalances.

(Source: etf.com)

After it was reported last Monday (11/9) that preliminary data showed Pfizer’s COVID-19 vaccine to be 90% effective, the market experienced one of, if not the largest, one-day momentum-laggard rallies ever. The Dow DJIA gained 2.95% on the day as stocks that have been hard hit during the pandemic, like Disney DIS and Chevron CVX enjoyed strong rallies. Meanwhile, the Nasdaq Composite NASD was down -1.53% as investors reduced their holdings in areas that had been leading the market, like technology. Over the intervening week-and-a-half there has been a lot of talk about the “rotation” trade i.e. a shift from areas, sectors, and styles that have performed well into areas that have lagged and thus, theoretically, have more upside during recovery. One of the primary shifts mentioned as part of the rotation trade is from growth to value, as growth has outperformed value in 2020 and for most of the last several years. 

Of course, within each equity style, there are a wide range of stocks spanning multiple sectors. Therefore, today we wanted to examine previous shifts from growth to value to see which sectors had the strongest performance. We began by looking at the spread between the rolling six-month returns of the Russell 1000 Value Index and the Russell 10000 Growth Index since 1995. Each time the spread peaked at 5% or more in favor of value, we looked back to a recent trough (i.e. when the spread was in favor of growth) and calculated the returns for the 11 macro sectors over that period. For example, we can see that around March 20, 2001, the spread peaked at a little over 39% in favor of value, so looking back we find it hit a trough (i.e. the relationship most favored growth) in February 2000, when the spread was just shy of -35%. We then calculated the sector returns for the interim period (2/8/2000 – 3/20/2001). The periods we examined are shaded in gray in the chart below; the line is red during periods when the spread is greater than zero (i.e. value outperformed) and blue during periods when the spread is less than zero. As the chart shows, the spread between growth and value has already narrowed significantly in recent months as it was almost -35% (in favor of growth) in September, but has risen above the -5% mark within the last week. 

There was significant variance in the length of the periods in our study, ranging from just 88 days to more than 400 days, therefore all of the returns in the table below have been annualized in order to make them more comparable. The best performing sector, on average, during the periods we examined was financials with an average annualized return of 18.64% followed by energy, utilities, and consumer staples. On the other hand, the worst-performing sector on average was technology with an average annualized return of -7.9% and is the only sector with a negative average annualized return. Technology was also the only sector with an average return lower than the S&P 500. On the surface this may seem strange, however, our study examined only the total return of each sector during the time period in question, it did not take into account the relative weights of the sectors within the index nor how those weights may have changed over time, which could have a significant impact on the performance of the overall index. Other laggards include health care, consumer discretionary, and industrials. Technology had the worst single-period performance as it experienced a decline equal to -74.22% on an annualized basis from 3/8/02 through 6/21/02. Materials had the single best one-period performance as it gained the equivalent of 80.91% on an annualized basis from 4/6/1999 through 7/27/1999. However, it also has the second worst single period performance as it had an annualized decline of -74.14% from 7/15/08 through 12/24/08. 

First Trust Sector Model Change
There are changes to the First Trust Sector ETF Model FTRUST as two ETFs are being added, both in the Financial space.  The First Trust Nasdaq Bank ETF FTXO and the First Trust Nasdaq ABA Community Bank ETF QABA were both added to the model as both of these sectors reversed back into a column of X’s on their respective relative strength charts versus the S&P 500.  In addition to seeing the relative strength charts reverse up, the fund score of both FTXO and QABA are above 3 suggesting the overall weight of the evidence is positive here.  With the addition of FTXO and QABA to the First Trust Sector Model there are now 12 positions held with the model... (Read more)

SSTREET: Buy Regional Banks & Banks
As a refresher, the State Street Sector Model SSTREET monitors the relative strength relationships between each of the sector and industry ETFs in the model universe versus the S&P 500 Index SPX on a 6.5% scale. ETFs that are showing positive relative strength versus the SPX (measured by a column of Xs) are included in the model and are removed only when that relationship reverses into Os. Over the past week of trading, the respective RS charts comparing the SPDR S&P Regional Banking ETF KRE and the SPDR S&P Bank ETF KBE versus the S&P 500 Index reversed up into Xs, warranting their additions to the SSTREET model holdings. This model remains fully invested through sector-based ETFs within the broader State Street family of ETFs and is evaluated on a weekly basis. The number of holdings can vary based on sector leadership within changing markets, and with the addition of XRT, the model is equally weighted across 14 positions at 7.14% each. Year-to-date, the SSTREET model is up 15.31%, outperforming the S&P 500's return of 9.74% (through 11/10)... (Read more)

Invesco Commodity Model Change
There is a change to the Invesco Commodity Model POWRSHARES this week: sell the Invesco DB Gold Fund DGL and buy the Invesco DB Oil Fund DBO. DGL was removed because its rank in the model’s relative strength matrix fell below the threshold to remain a holding in the portfolio... (Read more)

Daily Option Ideas for November 17, 2020