09/23/15   It’s Like Déjà Vu All Over Again

Editor’s Corner

Ron Rowland

Today, the sport’s world mourns the passing of Yogi Berra. Yogi made 18 All-Star game appearances, 21 World Series appearances, and owns more World Series rings than anyone. He was a baseball great. However, his legend extends beyond the diamond, and young people today are familiar with his famous quotes. The man was a master at using his “Yogi-isms” to state the obvious in an amusing manner.

If you were a biotechnology investor in 1993, then you are likely suffering a case of déjà vu this week. In February 1993, biotechnology stocks, as measured by the Fidelity Select Biotechnology (FBIOX) mutual fund, plunged 17% in one week. It is down more than 8% the past four days after Hillary Clinton decided to target drug prescription prices as part of her presidential campaign. Biotechnology has a history of producing volatile swings, but it’s the reason behind this week’s selloff that prompted the Yogi Berra quote in today’s headline. For those of you that do not remember, the plunge of 22 years ago was also attributed to remarks made by Hillary Clinton.

It doesn’t matter what your politics are, but as an investor, you need to be aware that investments have political risk. Yes, along with economic risk, interest rate risk, currency risk, default risk, bankruptcy risk, and a host of others, politics also are a source of risk to your portfolio. New ETFs have found ways to eliminate or mitigate currency, interest rate, and inflation risks, but the true risk-free investment remains an undiscovered Holy Grail of investing.

Much of the recent financial product innovation is taking place in the ETF industry. One of the reasons for this is the relatively low investment required by a sponsor to bring a new ETF to market. There is a lot to be said for “testing” a concept in a real-life and real-time market environment. Failures can easily be shut down, and about 25% of all ETFs brought to market have already been removed.

Given that backdrop, I can’t help but wonder if some enterprising firm attempts to bring a politically-hedged ETF to the market this election cycle. Unlike the Treasury futures and currency forwards that ETFs employ to hedge away interest rate and currency risks, there are no off-the-shelf political hedging vehicles. A politically-hedged product would have to accurately define which stocks and sectors would be helped or harmed by each candidate, and then hope there are no surprises along the way. This is a tremendous obstacle that is not likely to have a successful solution before this election cycle is over. However, there is still time, because it ain’t over till it’s over.

Investor Heat Map: 9/23/15


No one has to look further than the top of the list to find the major sector shift of the past week. Real Estate sits on the top today after leap-frogging seven other sectors in just a single week. If you call up a chart of the iShares US Real Estate ETF (IYR), or any other REIT fund, you will see that it does not look all that impressive. It did manage to post a gain in a mostly down week, but it did not overcome the downtrend that has been in place most of the year. As with all relative-strength rankings, sometimes getting to the top just means being “less bad” than all the others. Utilities is another sector that was able to post a gain for the week, allowing it to climb from seventh to third in the rankings. The theme is not hard to see here as Real Estate and Utilities are the two highest yielding sector categories. The Fed’s decision to leave interest rates alone last week has increased the attractiveness of many dividend paying stocks. The rise of Real Estate and Utilities caused five of the six sectors that were ranked higher a week ago to fall. Consumer Discretionary, the former leader, slid to second as Consumer Staples held steady in fourth. Telecom and Technology each dropped three spots, while Health Care and Industrials each surrendered two. Materials and Energy continue to post momentum scores that are much lower than the others, and the two have now completed twelve consecutive weeks on the bottom.


The ups and downs of the past week had little effect on the style rankings. Large-Cap Growth is at the top for an eighth week, showing its ability to maintain the leadership position throughout the recent market turmoil. Micro-Cap jumped from fifth to second, but it was not show of strength because it remains in a steep downtrend. Additionally, ranking changes are easily magnified when the momentum scores are compressed, and there are only two points separating second from fifth place. Mid-Cap Growth, Small-Cap Growth, and Mega-Cap all slid one notch lower. The bottom six categories are unchanged, with the three Value designations sitting in the basement.


The US was able to maintain its first-place ranking and widened its margin over the rest of the field. The Eurozone was the calamity of the week, falling from second to fifth as a weakening currency magnified declines for stock prices. World Equity moved a notch higher to take over second place. Canada was one of the few global categories to post an improved momentum score, and this accomplishment propelled Canada from seventh to third. However, renewed weakness in the Canadian dollar and the Energy sector may cause this rise to reverse course over the next week. Momentum scores are compressed in the middle of the rankings with EAFE, Eurozone, the UK, and Japan tightly bunched. Emerging Markets and Pacific ex-Japan posted improved momentum scores, and while that did not alter their ranking positions, it moved them both closer to the middle from an absolute strength perspective. China and Latin America continue to reside on the bottom. The declines of the past week has put iShares Latin America 40 ETF (ILF) at a new six-year low.

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.


“It ain’t over till it’s over.”
– Yogi Berra (1925-2015)


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