There were no changes to the Lg-Cap Portfolio this week. In fact the market didn't give much in the way of clarity in either direction. This is something we've grown used to in 2015. The market finds ways to frustrate both sides, this is apparent on social media where debates are sparking up regularly as to the next phase of this market. We can all agree that this is a sideways trending market over the past year, this means that both bulls and bears have been overeager in their postures. The longer-term trends remain higher showing the Bulls are still in control of this market. But over the shorter-term momentum in either direction has been lacking.
In environments like these we especially want to be focusing on leading stocks from leading sectors. If/when the market moves away from this current range it will be those leaders that come out the best for the next run.
Typically a healthy up trending market will be led by the offensive sectors- those most sensitive to improving economic conditions. These offensive groups tend to be associated with the Financials, Consumer Discretionary, Technology, and Industrials. On the other hand, in a weak market environment investors and managers seek out those more defensive groups that will hold up better during a recessionary environment. These are the high dividend paying groups like Utilities and Consumer Staples companies as well as Bonds.
Recently bonds have been closely correlated with stock prices. But in more traditional portfolio management a percentage of Bonds should be held based on your risk tolerance. The less risk you want to take, the more bonds you hold within your portfolio. Therefore Bonds are thought of as being defensive.
With this in mind let's take a look at those defensive sectors and see just how risky (or not) investors are positioning their funds. When a strong uptrend begins to roll over and show signs of change you will see capital rotation into these defensive groups.
Defensive
Consumer Staples (XLP)
Utilities (XLU)
Bonds (TLT)
Across the board we are seeing major (weekly) support violations on heavy trading volumes. This is a sign of institutional selling. If institutions are selling these defensive groups it means they are rotating money elsewhere. It is our job to be positioned where the money is rotating into, not out of.
Offensive
Technology (XLK)
Consumer Discretionary (XLY)
Financials (XLF)
Industrials (XLI)
With exception of the Industrials, the offensive market groups are in clearly defined uptrends and NOT seeing heavy selling volume. They are also not showing significant buying volumes which confirms that convictions in the overall market are mixed. However the evidence of PRICE continues to favor upside in equities.
An indicator many use for determining Offensive or Defensive bias is the relative performance of Consumer Discretionary vs Consumer Staples. The theory being if Discretionary stocks are performing better it means the consumer is spending their money on products they "want" rather than just what they "need". Here is that ratio currently:
XLY:XLP (weekly closes)
Zooming in on the "yellow box" area from early 2013:
Its been said that history doesn't repeat, but it often rhymes. The development from January-June 2013 looks remarkably similar to how it does at this very moment. It remains to be seen if the current breakout will rhyme with 2013. The current backdrop of investor polls and financial media headlines show more negativity than positive. But anecdotal data and narratives aside, our focus is to generate returns from wherever they come. Bonds and Commodities offer little for Long trends; currently the best game in town remains offensive oriented equities.
This is NOT a combination for a new emerging Bear trend.
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