What a strange week! I am not referring to my visit to Las Vegas, where I spoke at the MoneyShow, but the market action. I will update my outlook below, but the swings were wild. Today was particularly challenging for Top 20 and the Sector Selector ETF models. Here is how we stand:
Top 20 lagged slightly on the week. We ran into a couple of issue specific problems that explained the poor performance on the week. Our YTD lead has dropped to 1.32%, down from 1.83% a week ago and 5.44% just two weeks ago, at month-end. I am very disappointed with the near-term results, but we have had months like this before. A big part of the move can be attributed to Small-Caps underperforming larger companies over the past two weeks, but really the blame lies with some bad picks on my part. I was very proud last year to have not a single declining stock during the year from my beginning of the year portfolio, though we did take a loss on at least one security purchased during the year, but this year has been more challenging so far. Through the first four months of the year, we had been able to make up for those underperformers with lots of strong picks. That hasn't been the case yet in May. The fundamentals have deteriorated in the near-term for only one of the challenging stocks, so I remain optimistic that the price action is most likely short-term. In any event, while I am not happy with where we are compared to the market at this point in time, I am glad to be up over 8% so far this year despite the weaker returns in smaller stocks.
For CG/B, the story is totally different and, fortunately, better. CG/B actually rose this week, improving by 0.66% while its index of stocks and bonds was essentially unchanged. This improved our performance advantage to 3.3% from 2.6%. We accomplished this despite being underweight bonds. Strangely, we had five names up 2% or more, and two of which exceeded 5%. Just as I think the action in Top 20 is unlikely to persist, I would suggest that CG/B is likely to give up some of the rotational benefits it has enjoyed. I have a couple of trims lined up and will consider pulling the trigger over the weekend.
Our newest model, the Sector Selector ETF, had a horrible day today. The model is just two weeks old and has been essentially flatlining relative to the overall market. Going into today, 5 of the 8 funds were outperforming the S&P 500 on the week, but two of the laggards, XLF and VWO, were two of our largest positions. Still, on a weighted basis, we were pretty close. Today, though, we took hits on XLF and VWO again as well as XLK. While we are off to a slow start, I remain optimistic that we are well positioned, though I am concerned about the Financials (see below). I think that our "beta" or market exposure greater than the market, so the weakness is not helping.
Outlook
While I have no change to my bullish view, I must express a little caution. It's not much different than what I said last week - we have a good shot of testing 1320 or so on the S&P 500. The weakness in commodities and energy doesn't bother me at all, though I respect the near-term negative impact it can have on the market. What bothers me is the weakness in Financials, as they took out their March and April lows today. This is a yellow flag only at this point, but it bears watching. My key focal point for clues about the market remains corporate bonds and high-yield bonds. There is certainly no reason for concern based on the price action in either of those.
Articles
- Energy Decline is Positive for Market - Seeking Alpha
- Webinar: Finding Your Target Price- TradeKing (note - link live, but video not yet uploaded)
I have several names I continue to consider in Top 20, though I am not sure if I will be taking any action, though one is very close. In CG/B, my near-term expectation is to take some profits in some of our over-sized positions. I have a position that I will likely increase as well.
Have a nice weekend!
Alan Brochstein, CFA
www.InvestByModel.com
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