09/14/16   The Good Side of Bias

Editor’s Corner

Ron Rowland

Data are data, but the interpretation of various data streams is prone to bias. Let’s take the Census Bureau’s recently released report on income and poverty in the United States. Which of the following statements are true regarding the inflation-adjusted median household income for 2015?

1. It had its largest annual gain in history.
2. It posted its only increase of the past eight years.
3. It is in a 16-year downtrend.
4. It is in a 48-year uptrend.
5. It is at about the same level as it was in 1998.
6. It has gained less than 0.3% annually for the past 42 years.
7. It was determined by sampling fewer than 0.06% of U.S. households.

You have probably figured out where I am going with this exercise—all seven of these statements are true. Now, think about the first headline you read or news broadcast you heard about this household income report. Which of the above interpretations did they focus on? Whichever one it was, it might give you some insight as to the bias of the source. My example might also give you some insight regarding my bias.

The same is true for the stock market. The financial headlines concerning the stock market action of last Friday and yesterday all focused on the same thing—stocks fell, and they fell big! The Dow was down 394 points on Friday and was off more than 258 points yesterday, but how many of them told you the Dow was up more than 1,600 points over the past year? You may argue that the news media’s job is to tell you the news, and when it comes to the market, that means informing you of what happened today, or at least very recently. In this case, it is not so much bias as it is giving viewers what they want—a recap of changes since they last time they checked in.

Then again, stock prices are just another data stream. They are what they are, but they are prone to different interpretations based on the observer’s bias. Every stock transaction is a perfect example of what I am talking about. Every share that someone sells is also a share that another party buys. One person’s sell trigger is another person’s buy signal.

Bias usually has a negative connotation. However, without these different biases concerning the same raw data, buyers and sellers could not be brought together to make a transaction. Yes, bias also has a good side, and the markets couldn’t function without it.

Sectors
Although the momentum scores have taken a beating, the relative strength ranking changes were minor. Five sectors flipped from green to red, putting the current count at four sectors in a edgecharts-2016-09-14positive trend and seven trending lower. Additionally, the Industrials sector is only marginally on the plus side of zero and could quickly become the eighth sector in the red. Technology tops the list for the sixth week, and the Financials category is holding down the second-place spot for a third week. As a reminder, most indexes and ETFs will remove/separate Real Estate from the Financials sector at the end of this week. Energy climbed a notch to grab third, and the previously mentioned Industrials sector moved a step higher to fourth. Materials, Health Care, Consumer Discretionary, Consumer Staples, and Real Estate are the five that moved from positive to negative momentum readings. Real Estate took the hardest hit, dropping four places to 10th. Health Care managed to improve its stature by climbing three places higher to sixth, even though it is now in the red. Telecom and Utilities were the only two in negative territory a week ago, and Utilities remains on the bottom. The four highest-yielding sectors now occupy the four lowest-ranked positions as this once-favorable group comes under selling pressure.

Styles
All style categories managed to hang on to their positive momentum readings for today’s update, but many of them are clearly vulnerable. The quartet of styles representing the small-capitalization world remain firmly in control of the style rankings. Micro-Cap, Small-Cap Value, Small-Cap Blend, and Small-Cap Growth continue to hold a large margin over the others, but that will not prevent them from slipping into negative trends if the market decline continues. There was some shuffling of positons among the lower-ranked categories, including the four-spot jump of Mega-Cap, along with lesser improvements for Large-Cap Value and Large-Cap Blend. Mid-Caps all slid lower, and Mid-Cap Growth has now replaced Large-Cap Growth on the bottom.

Global
Despite the number of domestic sectors turning red, the U.S. climbed in the global rankings, and all categories ranked below it are still in the green for now. China is only one of two global categories that kept their same ranking positions this week, and it managed to give itself an even larger margin over the rest of the field. Emerging Markets, in third, is the other category keeping its same ranking position. Japan moved two spots higher to replace Latin America in the second-place slot. Latin America experienced some heavy selling, which pushed it three places lower to fifth. Canada fell four spots lower to 10th, and Pacific ex-Japan slipped a notch to land on the bottom. The common thread across the categories that fell is that they all have commodity-export driven economies. However, commodities as a whole held up relatively well this past week, so the fall of commodity-export regions is likely due to second-order effects, such as currency declines. The U.S. climbed out of the last-place ranking it held a week ago and now sits in eighth. The Eurozone, EAFE, and World Equity also improved their positions.

 

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


The eye sees only what the mind is prepared to comprehend.

Robertson Davies (1913–1995), Canadian novelist


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