Upcoming RS Institute - Dallas, TX

Register to join us in person for a 3-hour educational symposium on relative strength investing.  This event is for financial advisors and will offer 3 hours of CFP/CIMA credit.

• When: September 08, 2022, 10 am – 1 pm CT
• Where: 5000 Riverside Dr., Irving, TX 75039
• Who: Speakers include…
  • John Lewis, CMT, Senior Portfolio Manager
  • Andy Hyer, CFP, CIMA, CMT, Client Portfolio Manager
  • Ian Saunders, Senior Analyst
• Cost: Free!

Lunch will also be provided. Registration is limited to the first 75 advisors, so be sure to act fast!

Click here to register!

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Beginners Series Webinar: Join us on Friday, August 19th, at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Navigating the Models Page. Register Here

2022 has proved to be an interesting market environment, and the recent two-month rally has been no different. As discussed in previous features, strength from small-cap equities and growth stocks is to be expected from bona fide movements off lows. While this evidence is still present, broadly speaking, it should be noted that this market rally has seen continued leadership from more traditionally defensive sectors, namely utilities and consumer staples. Both sectors fought their way into overweight positions over the last two months in the DALI rankings, and currently are the only two broad-based sectors to sit above a 4.0 average score rank on our Asset Class Group Score (ACGS) page. Both sectors have an above-average score direction, suggesting continued strength in comparison to the broader market. 

As seen from the chart below, crosses between defensive sectors (non-discretionary in this case) and the more “risk-on” consumer discretionary sector typically occur around key market inflection points. When consumer discretionary is in favor versus consumer staples, market conditions (usually) favor risk allocation over more stable/defensive assets. That said, the consumer discretionary average fund score has not overtaken consumer staples; in fact, the divergence between the two recently widened. Some speculation on why this is happening - dominance from "quasi staple" stocks like Costco (COST) and Estee Lauder (EL) in comparison to more traditional, “old-school” defensive equities. Also, the possibility of lingering inflationary/macro fears could push investors back to the safety of these sectors along with persistently high commodity prices (especially in the case of utilities). Whatever the fundamental case may be, the spread between consumer discretionary and the two defensive sectors is one to watch as we head into the historically weak month of September.

We’re now less than two weeks away from entering the month of September, which has earned an unfavorable reputation with investors over the years. Historically, September has been the single worst-performing month for the S&P 500 Index (SPX), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite (NASD) (Source: Stock Trader's Almanac). The Almanac says “September is when leaves and stocks tend to fall; on Wall Street, it’s the worst month of all.” September has lived up to its reputation recently as the S&P 500 (SPX) was down -3.92% and -4.76% in September of 2020 and 2021, respectively.

As a result of the poor equity performance, many investors look for opportunities in other assets in September. One asset in particular that receives a lot of credit for helping investors through this frustrating month is gold, and the numbers below support this statement. Gold has posted a positive return in 21 out of the 35 Septembers since 1987. In other words, September has been a positive month for gold investments about 60% of the time. The average gain for gold during all 35 Septembers measured comes out to 1.38%, with an average of 4.98% during positive Septembers.

In the table below, you will also see the historical September returns for different asset classes as far back as data exists in our system. Not surprisingly, areas like gold, crude oil, and bonds have provided the best returns. In fact, each asset class (with the exception of US large-cap and mid-cap) has produced positive returns at least half the time.

However, up versus down is just half the story -- the magnitude of returns is another thing to consider. Take a look at the two international equity proxies in the table (the developed and emerging stock ETFs). Even though they have historically posted a gain more than 50% of the time, the losing years outweigh the winning years in terms of the magnitude of movement. For example, developed international stocks have seen gains in 55% of the Septembers going back to 1980, producing an average return of 3.62% in those years. However, during the 45% of the years when this index was down during September, the average loss was -5.14%. As a result, the average return for the month of September is in the red at -0.35%. Similar numbers can be seen for US small-cap stocks as well.

Although September is generally viewed unfavorably by equity investors, there have been a few impressive outlying Septembers, such as 2007, 2009, 2010, and 2013, all of which saw gains in excess of 3% for the S&P. Even though September has not generally been kind to the broad equity indexes, there have been opportunities provided by sector rotation. Take 2008 for instance. The SPX as a whole was down -9.20%, however, the DWA Bank Sector Index (DWABANK) actually provided a gain in excess of 5%. On the other side of the story, the Steel & Iron sector ([DWASTEE}) fell 31.8%, bringing the performance differential for September 2008 to 37.2%, the second-largest dispersion of all Septembers since 1999. Last year, while SPX was down nearly 5% in September, the DWA Oil Index ([DWAOIL]) was up more than 14%.  

On average, the differential between the best and worst performing group is around 23.5% over the last 23 years. Last year, the aforementioned DWAOIL was up 14.2%, while the DWA Precious Metals Index (DWAPREC) was the worst performer, finishing down -11.1%, for a differential of  25.2%. The smallest difference between the best and the worst-performing sectors in our lookback period was in 2018 when the best and worst performing sector indexes were separated by only 11.3%, while the largest spread came in 1999 (40.5%).

In the table below, you can see the best and worst-performing sectors during the month of September for each year going back to 1999. Precious metals has been the most frequent bottom performer, turning in the worst performance six times since 1999 (2006, 2013, 2014, 2017, 2019, and 2021), however, the precious metals index has also been the best performing group in five out of the 23 years, more than any other group. Semiconductors (DAWSEMI) has been another frequent bottom performer, finishing last in five Septembers.

Just a few months ago, fixed income as an asset class was slowly creeping up the rankings on the Asset Class Group Scores page as equities struggled. Despite rising interest rates, fixed income securities weathered the downside seen in the equity market in a much better fashion which led to an increase in relative strength. Fast forwarding to today, domestic equities have rallied strongly over the past two months and while interest rates further out on the yield curve have fallen, they have not fallen enough for most fixed income groups to compete with equities. The fall in relative strength seen in fixed income has led to an abrupt shift in the Asset Class Group Scores rankings. As it currently stands, there are no fixed income groups with an average score above 3.0 and the Inverse-Fixed Income group is one-hundredth of a point away from being the top-ranked fixed income group. When looking at a comparison between the All US Equity Diversified and All US Fixed Income Quality groups, the sharp decline in scores becomes evident with almost all the decline in the All US Fixed Income Quality group coming after the start of August.

Shifting to just the fixed income landscape, it’s not surprising to see the top two groups with the highest score directions are Preferred Securities and Convertible Bonds, both of which have heavy ties to equity movements. One of the prior leaders of the fixed income space, US Fixed Income Short Duration, fell below the 2.5 score threshold this week but is still one of the best scoring fixed income groups on the system. Despite the recent weakness, in a market environment where the trend for long-duration interest rates is still higher, short duration is still likely to be one of the safer fixed income groups. A higher scoring group in the fixed income space that can lower the risk from rising interest rates is the Floating Rate. The Floating Rate group is one of six fixed income groups with an average score above 2.50 and benefits from rising interest rates. As most clients need fixed income exposure for a variety of reasons, it may not be plausible to completely rotate out of the space, and using a floating rate bond fund can help stabilize fixed income exposure as interest rates rise. Overall, the fixed income market remains weak as interest rates have sustained their intermediate-term trend higher. Low duration or other less interest rate sensitive groups are still preferred for the time being as strength has held up much better in these areas compared to others. As a general rule of thumb, groups that are scoring above their broad representative, in this case, All Fixed Income, are areas to target for exposure within an asset class. Even though fixed income is weak compared to other asset classes, it’s still necessary for many clients’ portfolios.

Daily Option Ideas for August 18, 2022