The last 50-55 days have been a whirlwind. We’ve seen a lot of things that would normally upset the markets and yet the market continues higher. The Wall of worry continues to be scaled. The markets got to zones that our Chief Market Strategist Dan Russo called out on the down side and back on the upside. Along the way we provided comentrary to try and make sense of these moves. And yet the markets have baffled some of the greatest investors while some managed this down/up market very well. Those that did followed a strict discipline, which is not easy by any means. Add in a dose of Don’t fight the Fed as well, and the markets have had an almost fearless recovery.
A few weeks back on May 19th, I posted a blog on the Chemical Activity Barometer and how it is the leader of leading indicators. One subsection of the chemical industry was major plastic resins which had an uptick in March. I highlighted three ETFs to play the chemical names, XLB, VAW and IYM.
So let’s look at XLB, VAW and IYM and see how they’ve fared since the CAB showed a pretty decent increase in the face of uncertainty.
XLB – closed at $52.68 and trades at roughly $59.50 up ~13%
VAW closed at $112.42 and trades at roughly $128.5 up ~ 14%
IYM closed at $83.61 and trades at roughly $94.25 up ~ 12.7%
I commented on XLB in that post saying, “XLB – had the most concentrated positions in chemicals due to it’s low number of constituents equalling 28, low expense ratio and high liquidity were factors as well.”
Clearly all have done nicely and the fact is, it wasn’t me alone making this call, it was our system that helped me find these ideas to follow. Add that along with a little understanding of where chemicals stand in the supply chain and the outcome happened to be favorable. But there may be signs that the latest moves have run their course.
Weeks before that, on April 13th I showed some sector’s that typically benefit in the recessionary part of the business cycle, those were XLV, XLU, and XLP, Since that post they have done relatively OK. I also added the XLK and XLC due to the “Stay-at-home” theme in the markets. Those have done relatively well.
Closing Price on April 13th, 2020:
XLV closed at $94 and stands at roughly $103 as I write – up ~ 9.5%
XLU closed at $58.9 and trades as i Write at roughly $62 up ~ 5%
XLP closed at $57.70 and stands at roughly $60 up up ~ 4%
The alternatives or the Stay-at-home themed ETFs were:
XLK – closed at $85.39 and trades at roughly $100 up ~ 17%
XLC – closed at $46.64 and trades at roughly $55 up ~ 23%
I found these because our sector ranking did the work. My further analysis allowed me to recognize the “why” and take action with confidence.
As the facts change so should your outlook. End of story. Don’t be a perma-anything, Bear, Bull or Neutral, in this type of market. Be nimble. If your sails are up and the wind is not in your favor, drop them and start rowing to get to where you want to be.
Where are we today?
At the recent levels the top sectors on the sector grid are as follows: (take note that Energy has moved to a Neutral rating from Very Bearish 1 month ago)
We still see persistency in the XLK, XLV, XLC sectors and take note that XLP and XLU have fallen off, again, not that they have done poorly, but they have relinquished their top spots as leaders. XLB has also moved nicely to a bullish stance and ranked 6 out of 12, where 3 months ago it was Bearish and ranked 11 out of 12. Again, I’m not sure that XLB has finished it’s upward momentum but that type of move in such a short time is not typical.
For now, focus on the top sectors and stay allocated to those that can still provide some upside in a potential recession, but also stay aware of the thematic nature of where we stand as a society today.
Beware the Crowds at Extreme’s
At these recent highs it’s hard to remember to not chase the market at the extremes.
I am a fan of leading indicators like the CAB as I’ve highlighted, and that particular larger indicator, and somewhat “old-fashioned” one, is still signaling recession. “The May CAB reading is consistent with a recession, but given the small unadjusted decline of only 0.3 percent, one that may bottom out,” said Kevin Swift, chief economist at ACC. Read the news release here.
The modern realities of this market are alive and well. The technology, healthcare and communication sectors still lead the markets. If for some reason that changes or the CAB does bottom out, and other factors come into play, like a vaccine for Covid-19, more stimulus, civil unrest starts to subside, people actually go back to work and out to eat, or better unemployment numbers or any other factors you can see, then adjust accordingly.
Pete Carmasino is Managing Director at PortfolioWise, an ETF ratings system powered by Chaikin Analytics. Pete has over 25 years in the capital markets industry. He previously ran his own RIA firm for several years where he created his own ETF model strategy. In prior roles, Pete was a High Net Worth Advisor and Institutional Sales Trader.
Follow Pete on Twitter @carmasino