The past week of market action saw the US Equity Core Percentile Rank (CorePR) continue to push higher to a recent reading of 99.30%. We examine the frequency of elevated CorePR readings and average forward returns from such levels.
The past week of market action saw the US Equity Core Percentile Rank (CorePR) continue to push higher to a recent reading of 99.30% through trading on Wednesday (7/7). As a refresher, the CorePR tracks the relative position of the S&P 500 Index Funds group, our core market representative, when compared against the rest of the groups found on the Asset Class Group Scores (ACGS) page. This recent reading came as the core moved into the second-ranked position, sitting behind MLPs with a recent group score of 4.39. While this is not the highest average score the group has seen so far in 2021, it is one of the highest readings we have seen for the CorePR. This is only the third time the reading has gotten to the 99th percentile, which last occurred in November 2019 and previously in early October 2018. Those two instances saw drastically different movements for the S&P 500 Index SPX in the months that followed. The end of 2018 saw a sharp market correction and enhanced volatility in the last few months of the year, while the market continued to push higher in late-2019 and continued to hit new all-time highs in 2020 prior to the pandemic-induced market decline.
As we covered in the Fund Score Overview last Friday, it is a good sign to see elevated positioning for the CorePR reading, as this points toward a favorable stance for the broader domestic equity space. However, extremely high levels for the CorePR can present the risk of a near-term pullback as this points towards a narrowing of market strength. The bullish nature of domestic equity markets makes it fairly normal to see high CorePR readings, but just how often have we seen levels north of 90%?
To help answer this question, we measured the percentage of days the CorePR reading sat in each decile from its origin on November 18, 2003, through market movement Wednesday. We also took the average return for SPX over a forward one, three, six, and twelve-month timeframe for each decile.
As shown by the above table, the CorePR reading has sat at 90% or higher for 21% of the trading days since late-2003. In fact, the reading has been north of 70% for the majority of its existence at 53% of the trading days. The average forward return data shows that the broader hypothesis of elevated positioning leading to strong domestic equity returns holds true, as the returns are generally higher when the indicator remains above 70%. However, we can also see that the average returns become more muted as the reading moves from 70% to 100%, highlighting the potential for a near-term reversion or normalization in the price action for the core market representative.
Out of the 976 trading days that have seen a CorePR reading at or above 90%, roughly 62% of the average returns one month out from those days were positive. If we go three months down the road from those elevated positioning days, we see that 72% of returns were positive. This continues to improve over the forward six-month and twelve-month average returns at respective positive return “batting averages” of 78% and 87%.
At the time of this writing on Thursday, the S&P 500 Index is posting an intraday loss of about 1%, which would mark its fourth-worst daily decline since the end of March. While we cannot know with certainty what the next few months hold, the historical CorePR data for positioning above the 90th percentile does present the possibility of muted near-term movement over the next month, but that movement has shown historical improvement further along the timeline.
