Last month was not kind to risk-on stocks, many of which were areas of relative strength. Technology had its worst month since March, seeing the State Street Technology Select Sector SPDR ETF (XLK) fall 4.8% to move into correction territory. Meanwhile, we saw underperformance from other previously favored areas, with the vanguard growth ETF (VUG) and Invesco S&P 500 high beta fund (SPHB) also stumbling. Much of the selloff in growth and high beta areas was driven by the buzz of a potential bubble, with Google searches for “AI Bubble” this year peaking mid-November. During periods of pullback, it can be tempting to ignore the long-term picture instead hone in on recent changes and narratives. Some of reader may have been tempted (or still are) to sell out of the previously mentioned areas due near-term movement and rumors. However, those who listened to the noise would have missed out on the upside of the last two weeks.

Even with the dip last month, those risk-on areas continued to hold some of the most long term strength within domestic equities, comfortably remaining groups to own. Action over the last two weeks has seen those same names bounce back. Looking again at tech representative XLK, the fund has now traded higher on ten consecutive trading days, which is the longest streak for the sector since September 2020. Technology remains at the top spot of DALI while XLK holds an extremely strong fund score of 5.46, highlighting the significant strength of the broader sector.

Additionally, it hasn’t just been the largest names pushing the sector higher. The bullish percent for Technology (^BPECTECH) was in washed out territory below 30% last month, but the indicator has since reversed back up into Xs. Reversals from below 30% are one of the most positive developments on a bullish percent chart, which bodes well for technology going forward.

Additionally, it hasn’t only been technology that rebounded over the last two weeks. Growth stocks also took a hit in November, leaving VUG on a streak of two consecutive sell signals. However, action at the very end of November saw the fund break a double top at $490 to move back to a buy signal. Meanwhile, high beta stocks have regained their foothold over risk-off areas of the market, with SPHB trading at all-time highs again. The high beta fund previously reversed into a column of Os on its 3.25% RS chart versus the Invesco Low Volatility Fund (SPLV). However, this week allowed high beta stocks to regain near-term strength versus the low volatility fund, serving as another risk-on sign.

As is often the case, the long-term strength of the marker’s leaders have won out over the noise in the market for now. The weight of the evidence continues to favor risk-on areas, especially as they rebound and reverse higher. Technology and growth stocks will eventually fall out of favor at some point in the future, but there’s no need to sell those groups until we see a substantial decline in their long-term strength, despite what market narratives may say.

Monday marked the final evaluation for the monthly stock and fund models on the NDW Models page, and while a number of models had changes, one in particular piqued interest – the FSM CoreSolution All Cap World 2M PR4050 (FSMCORSOL5-ACW-2M-PR4050).

For those not familiar with the All Cap World model, it provides investors with an adaptable core global equity solution. The model will seek to hold the top two scoring ETFs based on NDW’s Fund Score System out of a universe of 26 ETFs. Additionally, the All Cap World model has a defensive cash trigger based upon the percentile rankings of the core S&P 500 Index funds and US Money Market groups on the Asset Class Group Scores page. When the percentile ranking of the US Money Market group moves above the 50^th percentile and the core S&P 500 group falls below the 40^th percentile, the model will maintain 100% exposure to cash. There are two versions of the All Cap World Model, one that is evaluated monthly (the main focus of today’s piece) and the other is based upon a seasonal quarterly schedule (February, May, August, and November).

For December’s evaluation, the FSM CoreSolution All Cap World 2M PR4050 (FSMCORSOL5-ACW-2M-PR4050) sold the iShares Morningstar Growth ETF (ICLG) and bought the iShares MSCI Emerging Markets ETF (EEM). This marks the first time since 2023 that the monthly All Cap World model has held exposure to international equities and the first time since 2009 (utilizing back-tested data) emerging markets exposure by way of EEM has been maintained. This marks the ninth trade in 2025 for the monthly All Cap World as the model has generally rotated among growth related funds with a brief stint in low volatility in May.

Considering the addition of EEM to the monthly All Cap World model, the table below examines the prior times the model has maintained exposure to EEM, as well as EFA for additional context. Bear in mind, the inception of the All Cap World models are April 2018, so most of the trades shown below are a result of back-testing that dates to the early 1990s. In total, there were seven times that EEM and EFA were held simultaneously, with most of the occurrences happening in the early 90s and the last being in 2007. EEM has been a holding within the strategy a total of 22 times (including back-test), while EFA has been a holding 17 times. Positive performance of the trades for both funds occurred half of the time, but EEM has generally faired better with average and median performance besting EFA’s. A half dozen trades with double digit returns help EEM with the highest return of 72% coming following a year and a half period from late 2004 to early 2006.

While reviewing performance, a hallmark theme of NDW relative strength-based strategy is noticed. Though not every trade shown in the table produced a positive return, the majority did, and the minimum returns for both funds are in the single-digit range. This shows that once the model identifies a trend that is not sustaining, it quickly weeds that fund out. But a trend that maintains and produces a notable return is ultimately what relative strength seeks.

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