Sectors & Factors Analysis 21 April
This article covers a brief overview of various sector and factor statistics. It is part of our Nostromo series, which focuses on sector and factor selection, according to the overall market environment.
Sectors Overview
We start observations by analyzing the most recent performance according to our 200-day chart. What immediately stands out are XLE, breaking out dramatically, up 55% since early July, as well as XLC, separating from the pack in an a brutal -21% drawdown.
Every other sector is trading between these two extremes, with XLU and XLP performing well otherwise.
On the deviation graphs, the same story plays out, but we can more clearly separate the recent winners from recent losers. At this point, the market is showing a clear defensive tilt, with low beta sectors outperforming.
Just in case it wasn't clear enough, the sector table sorted by 6 months excess returns proves the point. Low Beta rules the day for now. I expect to see the bottom sectors of this table start performing much better if indeed we are about to see a resurgence of a bull market. In any case, a significant rotation could be in the books if SPY manages to break out above its recent trading range
Factors Overview
On the factors front, it seems like most styles are underperforming. In fact there are only a couple of ETFs that have positive excess returns VS SPY. EEM (Emerging Markets) and EFA (Developed Foreign Markets) are under a lot of pressure, down -18.9% and -8.62% respectively.
Defensive looking factors are the ones holding their head above water here, similar to the Sectors front. The only outperforming names are IVE (Value), RSP (Equal-Weighted S&P) and DIA (Dow-Jones Index Tracker). Factors are a bit of a mess, overall, with no clear pattern in leadership or candidates for a rotation.
Out of all sectors and factors, our own Nostromo Strategy would pick DIA to buy over the SPY. That selection is made on a cautiously optimistic bullish assumption that if the market were to turn up, it would lift components of the Dow as well. If instead we get more downside, the Dow seems to hold up much better than other factors, and better than SPY.
Takeaway
If you are bullish on the direction of the market, it may be best to start looking for opportunities on beaten down stocks from laggard sectors (XLC, XLK, XTN, XLY). These are most likely to benefit from a risk-on rotation. A more bearish stance would be expressed by sticking with current leaders, although it has to be said they are not cheap at current levels. In the short term, I agree with what my strategy is suggesting: DIA ETF - quality, large cap companies, until we get a better reading of the economy and the Fed's stance (actions, not words) on monetary policy.
Andrei Sota