Long-time readers of this column know they can quickly ascertain the areas of strength and weakness in the market with a quick glance of the EdgeCharts that are included with each weekly update. These charts graphically display the intermediate-term momentum for 33 market segments across three (sectors, styles, and global) major groupings.
The green/red color-coding indicates positive/negative momentum, which can be translated to either an upward or downward trend if that is the terminology you prefer. The relative ordering shows the strength of each category in relation to the others in a traditional relative strength ranking. Last, but not least, the magnitude of each category’s strength is communicated by the physical size of the bar and its associated quantitative value. This number is an annualized calculation of its current trend, where 15 indicates that its intermediate-term trend is sloping upward at the rate of 15% per year.
This type of analysis is not limited to the sector, style, and global categories displayed below. For years, I have generated similar charts comparing bond segments, commodities, and broad asset classes. The growth of smart-beta ETFs that follow various factors, events, and strategies provides additional insight of market action. About a year ago, I started creating EdgeCharts for these other groupings.
The Factor Edge chart currently consists of 13 factors that can be isolated with individual ETFs. Low Volatility tops the chart today, followed by Momentum, Quality, and Capitalization. These are the factors demonstrating success in today’s market environment. They are the representatives of “what’s working now.” By the way, Capitalization is the traditional (old-fashioned) method of indexing that weights constituents by their market capitalization. Because it is the traditional, most widely used method of indexing, it is often overlooked as being a “factor.” The Vanguard Total Stock Market ETF (VTI) is the benchmark I use to represent this market capitalization category.
At the other end of the spectrum are the lagging factors. At the present time, these include Growth, Small Size, and High Beta. Many multi-factor ETFs are also on the market. Combining Low Volatility with Current Yield is one popular approach. Additionally, many ETF sponsors have introduced four-factor funds that choose their holdings based on a combination of Low Volatility, Momentum. Quality, and Value. The possibilities are endless.
Selecting stocks based on events or special situations is also popular. A chart is not included today, but the strongest performing categories today include Insider Sentiment, Buybacks, and Float Shrink. Spin-offs and Earnings Surprises are the laggards among this group that also includes IPOs, Splits, Mergers, and Accidental High Yield.
Another grouping, that I simply call “strategies,” is for investment approaches that do not fit neatly into one of the other groups. Interestingly, the strategy with the best relative strength at this time is Buy & Hold. Other top performers include Currency Hedged International and Covered Calls. The worst performing category in this grouping is 13F Filings, which is an approach that attempts to mimic the holdings of hedge funds and star managers by analyzing their 13F filings with the SEC. Other categories in this group include Equal Weighting, Volatility Hedged, Sector Rotation, Market Neutral, Long/Short, and Defensive. With ETFs, there are many ways to slice the market.
Sectors: The sector landscape improved this past week with five categories moving from red to green. Utilities is now the lone sector remaining in the red. Technology leads the lineup for a fifth week and shows no sign of relinquishing that position. The Industrials sector keeps its second-place ranking and received another boost from defense contractors as global tensions dominate the news. Consumer Discretionary bounced back from recent weakness on strength in retailing stocks. It climbed two spots and transitioned back into a positive trend in the process. Financials and Materials held their ground while Telecom slipped two places. Real Estate, Consumer Staples, Health Care, and Energy are the other four sectors that successfully shed their negative trends, but they still lag the broader market. Something has to be last, and for the third week, that something is the Utilities sector.
Styles: Larger capitalization segments continue to provide the market leadership from a style-box perspective. Investors are finding comfort in the perceived safety of the blue-chip Mega-Cap stocks. This in the ninth consecutive week that Mega-Cap has claimed the top of the style rankings. Consistent with that theme, Large-Cap Growth, Large-Cap Blend, and Large-Cap Value occupy the next three slots. Last week, all categories below these top-four were shaded in red, and today they are all back to green. In contrast to the stability shown by the upper-half categories, there remains much jockeying for position among the lower-half constituents. This week, the Small-Caps moved back ahead of the Mid-Caps. However, Micro-Cap, the smallest of the small, remains in last place.
Global: Japan tops the global rankings for a second week, despite slipping into an economic recession a couple of weeks ago. The U.S., which was knocked from the top spot by Japan last week, held onto its second-place ranking and narrowed the gap with Japan. China and World Equity held their positions, and both improved their status by moving from red to green. The bottom seven categories remain in negative trends, although their relative rankings changed significantly. Pacific ex-Japan rose three places and is on the cusp of transitioning into a positive trend. Latin America posted a good week, boosting its ranking by two places and pushing the broader Emerging Markets category higher in the process. After nine weeks on the bottom, Latin America has now halted its steep decline and is showing signs of stability. The Eurozone and the U.K. both fell three places lower, primarily on currency weakness. Canada is mired in last place for a second week.
Disclosure covering writer: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned. This article was originally published November 25, 2015 in the Invest With An Edge weekly newsletter.