Are You Exposed

April 6, 2021  |  Michael Reilly

The S&P 500 index has sent plenty of mixed messages to investors during the 1st quarter of 2021 – grinding sideways, reaching for new highs, and consolidating some more.  

And although the index is in an uptrend in the long-term, it continues to look range-bound and indecisive in the short-term (box). This has left many investors befuddled and frustrated.

Investors may be perplexed because for too long, the market has been dominated by one group of stocks. Growth stocks. 

Investors seem to have forgotten that markets consist of Growth stocks, Value stocks, and Blends.

Rotation from one size and style to the next is normal and healthy – even if this rotation doesn’t happen at prescribed intervals.

Most successful momentum investors know it’s a cardinal sin to fall in love with one stock or sector. However, they often overlook style changes – moves from Growth to Value or vice versa.

It’s been easy to forget, to get lulled into a false sense of security when the market has been dominated by one superstar for so long. 

However, as many investors have learned in the last 6 months, your portfolio’s success is dependent on your ability to stay alert to changing market conditions, even if these changes are slow to develop.

While large-cap growth stocks dominated the landscape of success, value stocks sat quietly, waiting for the chance to shine. All they needed was a little help – and that help has arrived in the form of higher yields and inflation. 

I’m not going to go down the rabbit hole of fiscal and monetary policy with a long-drawn-out discussion about higher yields and inflation.  So, let’s just agree markets are experiencing the effects of higher yields and inflationary pressures. 

Will it last? I don’t know, if it changes we’ll adapt accordingly. But for now, it’s here, so we work with what’s in front of us. I’ve never found fighting the trend a fruitful endeavour.

So let’s look at what outperforms in an environment of higher yields and inflation. 

Among other things -Industrials. 

So let’s dig in….

How did Industrials do vs the broader market? Take a look at the relative strength ratio chart below…

Industrials are outperforming the broad market. This is seen in the rising line of the ratio chart between Industrials and the S&P 500 index. As a reminder, a rising line favors the numerator – in this case, Industrials over the denominator, the S&P 500.

And when we see outperformance on a relative basis, we expect to see it on an absolute basis too.

Here is a price chart of Industrials  After some side-ways consolidation between November-January, Industrials found demand in control, breaking out to new all-time highs.

This acceleration in price momentum has resulted in a 16.12% return in Industrials over just the previous three months – while the S&P 500 gained 9.90%.

Looking out over 6 months, Industrials has very quietly jumped nearly 30% (29.75%), while most investors made the mistake of focusing on the S&P 500 (+19.53%).

Here’s a list of Industry groups that comprise the biggest part of our sector proxy XLI. These 4 Industry groups make up 65% XLI

If investors are looking for a few trade ideas, it never hurts to take a look at the industry groups and holdings of these ETFs. 

Here is a list of the top 5 holdings of the weighted ETF XLI.

The momentum and gains seen in the industrial sector are not only the result of the six stocks above. The sector strength is just as clear looking at the equally weighted ETF – RGI

The equally weighted Industrial ETF (RGI) has nearly doubled the return of the S&P over the first 3 months of 2021 – gaining 18.16%.

Here’s a table of the 6 best performing Industrial stocks over the first 3 months of 2021.

If you lacked exposure to this relative strength leader during the 1st quarter 2021, you missed out on American Airlines, up 55.64%, United Rentals, up 44.85% or Deer & Company, up over 40% year-to-date. 

If your portfolio is still over-weighted to last year’s relative strength leaders, now may be a good time to adapt to the current market environment and realign your holdings to avoid future opportunity costs.

Until next week..


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