Participation has waned, but that doesn't mean that equal weighted options still aren't viable. We explore this idea today.
While not as “exciting” as finding a completely new stock/sector idea, using the NDW platform to identify those points of consistent relative strength can be part of the foundation of a strong portfolio. With that in mind, today’s pulse will utilize relative strength charts (RS) to build on the idea that risk-on areas are still doing well… while blending in some themes about broader participation metrics which have waned as we moved through the back half of the year.
Starting briefly with the latter, we know that broad market participation still sits well off 2025 highs. ^BPSPX, which measures the percentage of S&P 500 stocks trading on PnF buy signals sits at 56%.... still above the halfway mark but well below the 2025 highs at 74% from the summer. This in of itself isn’t a “bad thing” but is certainly worth monitoring as we move into the Fall. Of course, more stocks participation in upside action will typically bode well for equal weighted strategies… which opens up our main topic for today.
Most of you probably think about using relative strength to determine between two stocks, or maybe one stock and a major index/cash. Zooming out a bit, we can also use relative strength charts to identify major themes in the market. One of the most typical of these broad market relative strength comparison pits consumer discretionary (risk-on) against consumer staples (risk-off) to identify just what kinds of stocks might be in control. It should come as no surprise that risk-on options are doing quite well, but finding ways to quantify that can be difficult. Looping back in our opening participation conversation from the start, we can utilize equal weight representatives for both sectors (RSPD & RSPS) as proxies for comparison. As detailed in the chart below, RSPD most recently posted a 4th consecutive RS buy signal against RSPS, moving to its highest point of “relative price” over the last 35 years. Reminder, there are some out there that would look at this as a bad sign- us chartists typically won’t. The main takeaway here is that the “average” consumer cyclicals stock is relative stronger than the average consumer staples stock. Switching between RSPD & RSPS based on signals has been historically additive.
Cap weighted names still remain in control. Taking our equal weight “winner” RSPD, we can compare that fund to its cap weighted counterpart XLY. XLY remains on an RS buy signal against RSPD, despite moving back into a column of O’s against the fund earlier this year. From a pure performance perspective, XLY lags behind RSPD so far this year but a continued rotation towards a smaller subset of cap weighted names is certainly worth watching as we journey through a traditionally bumpy month of September.
