10/21/15   Forward To The Past

Editor’s Corner

Ron Rowland

In case you haven’t heard, today is “Back to the Future” Day – October 21, 2015 – the date that Marty McFly and Doc Brown dialed into their DeLorean time machine in the movie “Back to the Future Part II.” The concept of time travel is always intriguing to investors and gamblers hoping to get wealthy based on knowledge of the future.

Unfortunately, predicting the future with certainty is impossible. Sure, you can often put the odds in your favor by studying the past, and sometimes pure guesswork turns out to be accurate. However, do not make the mistake of thinking these circumstances can be equated to omniscient predictive powers.

The mainstream financial media loves predictions. For them, it seems that very few things are more newsworthy than a prediction of a bear market, a new bull market, or the value of the Dow Jones Industrial Average on December 31. They are often entertaining, and investors need to keep that in mind – these “predictions” have entertainment value and that is all. Occasionally, some will be correct, but that is much more likely to be a coincidence than proof of accurate predictive power. The laws of chance say that with enough predictions, some of them will likely be correct.

I predict that this time next week, I will be writing about the Fed’s decision to raise interest rates or to leave rates alone following the conclusion of its October FOMC meeting. This type of prediction has little informational value because the Fed has been very reliable when it comes to holding its scheduled FOMC meetings. In this case, I am using the past to anticipate the future. I haven’t looked up the actual statistics, but the probability of the October FOMC meeting concluding on October 28 is likely to be better than 99%. Therefore, you will not ascribe any special powers of foresight to me if my prediction comes true, nor should you.

You will also notice that I did not predict what action the Fed will take about interest rates. At this time, nobody knows. The CME Group calculates the “implied probability” of a Fed interest rate hike based on its analysis of Fed Funds futures contracts. As of last week, the probability of a rate hike at the October FOMC meeting was just 5%. The probability increases to 30% for the December 16 FOMC meeting, and it doesn’t get above 50% until the March 16, 2016 meeting.

Investor Heat Map:10/21/15

Sectors

The sector rankings continue to show improvement with Telecom and Financials moving from red to green this week. Real Estate climbed a notch to knock Utilities out of first place, although Utilities didn’t fall far and is solidly in second. The next three sectors did not change their order, but Consumer Staples, Technology, and Consumer Discretionary all managed to increase their momentum. Telecom climbed two spots, Energy held steady, and Industrials slid two places lower. Materials lagged the field in performance this past week, slipped to tenth place, and is one of the two sectors remaining in the red. Health Care is at the bottom for a third week after providing much of the upside market leadership through the first seven months of the year.

Styles

Large-Cap Growth was the only style category making the transition from red to green this week, and it climbed two spots to fourth. Large-Cap Blend produced the largest ranking change as it moved from fifth to second. These changes put the four largest capitalization categories squarely at the top of the rankings. Mega-Cap is on top for a fourth week, with the three Large-Cap groups lining up behind it. The Large-Cap strength pushed both Small-Cap Value and Mid-Cap Value three places lower, undoing the market’s preference for Value that was visible last week. Value still holds the edge over Growth, but big capitalization trumps them both. The five categories still in the red are mixture of Small- and Mid-Cap Growth and Blends. Micro-Cap is also among the laggards and is in tenth place, while Small-Cap Growth is on the bottom for a fourth week.

Global

Last week, all eleven global categories were in the red. Today, six of them are posting momentum scores on the plus side of zero. None are exceptionally strong, but it is still a huge improvement. Emerging Markets is on top for a second week. China was the big upside mover, leaping from tenth to second. The momentum scores were, and still are, compressed, so China’s move is not unprecedented. However, it is impressive nonetheless and investors should take notice. The US fell a notch to third as World Equity held steady in fourth. The UK and the Eurozone are the last two of the six categories moving to green. While China was the big upside mover, Canada went the other direction. Canada plunged from third to tenth as the country’s recent stock market rebound stalled out. Latin America was the only global category to lose momentum over the past week, pushing it deeper into the red.


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.

 


“Your future hasn’t been written yet. No one’s has. Your future is whatever you make it.”

– Doc Brown from “Back to the Future Part III” (1990)


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