A Week In Review: Sector Analysis, Correlations, A Unique Price Movement, Money Mistakes, IPO Activity, & Wagyu Beef

The S&P 500 was able to squeak out a gain last week, finishing up 0.35% with the Dow closing up 0.40% but we saw a decline in small caps as the Russell 200 closed lower by 1.05% and international equities (EFA) closed basically flat. Bitcoin futures began trading last night, and will likely make up the lions share of commentary this week. With just one mention of crypto, here are the charts and news stories I found of importance over the last week.

Sector Performance
Looking beyond just the major ten S&P sectors, Zacks shows the following breakdown of YTD returns for 16 equity sectors. Aerospace is currently the best performer, lead by the defense stocks. Retail, which makes up both online and brick and mortar stores, is the second best performer as internet commerce lead the way, up 59% while regional department stores are down 18% YTD.

Sector Correlation
Turning our attention to the S&P sectors and their correlation among the ten over the last 20 trading days. Industrials and Consumer Discretionary stocks have the highest correlation to the S&P 500. Technology and REITs have moved to be negatively correlated to the broad market.

Sector Momentum
Over the past 20 days Financials and Industrials have seeing the most improvement in their respective Relative Strength Index (RSI) indicator readings. Six of the ten sectors saw positive movement in their RSI. Meanwhile, similar to their correlation to the S&P – Tech and REITs have seen the largest declines in their momentum indicator.

Unique Price Action in the S&P 500
Last Monday brought an interesting event in U.S. equities with the S&P 500 gaping higher at the open but then closed in the red by the close. John Kicklighter, Chief Strategist for DailyFX.com, noted the unique price action and that it’s something we’ve only seen occur a handful of times since 1950. 

Momentum Leads the Pack of Factors in 2017
James Picerno of CapitalSpectator.com recently took a look at the performance of the most popular factors used in investing. So far this year momentum has been the clear winner, followed by quality and low volatility.

Poor Performance Continues for Many of 2016 Worst Performers
Investors have often had success looking to the prior year’s worst performers as investment ideas for the coming year. Looking to take advantage of a period of mean-reversion in the bottom of the barrel of S&P 500 components. Bloomberg notes prior years success of this strategy, “In 2016, for instance, the worst performers of the S&P 500 from the year before were up nearly 53 percent. Since 2010, the dog packs have staged an average rebound of 28 percent in the year after their poor performance.” However, 2017 has not played to the same tune as the 2016 or 2010. Below you can see the past performance of one year’s trash being the next year’s potential gold.

In fact, they may produce a negative return – following the beat set by 2015. As noted above, momentum has been the best performing factor strategy so far this year, which is bad news for those seeking mean-reversion trading opportunities. Below is a chart of the 2016 worst performers and their current ’17 return. Charts courtesy of Bloomberg.

Correlation Between Equities & Volatility Rises
While equities and the Volatility Index are long-term negatively correlated, they do go through periods where correlation rises and becomes positive for a few days at a time. In fact, when using a look-back period of two weeks (10 trading days), the recent correlation between the S&P 500 and the $VIX has been the highest in the last 20 years. In my Week in Review post on October 30th, I noted the rise in correlation that had taken place the week before that was quickly followed by a near 20% rise in volatility in one day before the VIX declined back near its low.

Household Leverage Continues to Decline
Urban Carmel shared this chart on Twitter last week, which shows a decline in the third quarter of the average debt-to-net worth of the U.S. household. We are now back near the prior low and at a level that we haven’t seen very often except after the tech wreck and the 1970s.

Biggest Money Mistakes
CNBC recently reported on a survey conducted by GoBankingRate which asked consumers what their biggest money mistake has been over the last year. Not too surprisingly, “More than one-third of Americans — 36 percent — said their biggest financial regret of 2017 was not saving enough money.”

Strengthening IPO Activity
Callum Thomas of Top Down Charts shared this chart of IPO activity, which has seen a recent pickup. While the 3-month average of IPO withdrawals has seen a decline in 2017, the average number of filings has risen near to a 10-year high. Callum notes that the trend in filings typically tracks the overall trend of the equity but a bearish sign can occur when a divergence of lower highs as the market continues to make higher highs.


The Rotation Out of Tech May Be Just a Shift in Factors
While many investors were calling for a rotation out of tech during the recent period of weakness, one explanation is a shift in factors. From Bloomberg, “The popular narrative is that stock pickers are selling tech after the massive runup this year and are piling into companies set to benefit from U.S. tax cuts. But observers such as Andrew Lapthorne of Societe Generale SA don’t buy it. They look at the contours of the selloff over the past few days and have a different take: A few heavy hitters are dumping factor positions that incidentally hurt chipmakers and software companies and once they’re done, the rally will resume.”

Focus More on The Fed Funds Rate Rather Than The Yield Curve
Bill Gross believes investors are miss-focused when reviewing the fixed income market. Specifically, Gross believes investors shouldn’t worry too much about the flattening yield curve but to pay more attention to where the Fed Funds Rate is headed. From a report from Bloomberg A fed funds rate above 2 percent could prove too high, according to Gross. “The critical factor is really the level of short rates and what is the real neutral fed funds rate,” Gross said, referring to the central bank’s main interest rate after it’s been adjusted for inflation. Fed officials and market observers currently see that real neutral rate around zero, placing the nominal fed funds rate at around 1.5 percent to 2 percent, he said. As long as the fed funds target doesn’t top that 2 percent level, “the flat yield curve should not be as important as in prior cycles where flat curves were a result of excessive Fed tightening.”

What We May Be In Store From D.C. in 2018
Josh Brown has a good piece up looking at what may be in store from the Trump administration in 2018.  “The hard turn toward authoritarianism is already at hand. The President and his state-run media apparatchiks at Fox News are already hard at work gaslighting the 30 million or so fanatics that they can count on no matter what. It went from “no contact with Russians” to “okay, some contact but it was about adoptions” to “yes, collusion, but the President’s inner circle didn’t know about it” to “collusion is okay because Hillary.” After an extremely tepid 2017, there’s a great chance we see more political-induced shocks to our system in 2018.

Caution towards Cryptocurrencies May Be Warranted
When Fred Wilson, a VC who also serves on the board of CoinBase, speaks about crypto it’s probably worth listening, “I think we are going through a similar phase of growing pains with crypto/blockchain. And things will be messy for a while. So proceed with caution, don’t get too far out over your skis, don’t invest more than you can afford to lose, and be prudent.”

Britain Makes Progress on Its Eurozone Exit
While far from being completely settled, Britain has reached an important check point in their eventual exit from the Eurozone. From The Financial Times, ” “Britain has reached a historic deal on its EU exit terms, enshrining special rights for 4m citizens and paying €40bn to €60bn in a hard-fought Brexit divorce settlement that clears the way for trade talks next year. Theresa May, the UK prime minister, and Jean-Claude Juncker, the European Commission president, met in Brussels early on Friday to sign off a 15-page “progress report” that will allow EU negotiators to recommend opening a second phase of talks on post-Brexit relations.”


Maine Sees a Drop in Lobster
Fan of lobsters? Well There is a reason for concern as Maine has seen a large drop in the number of lobsters off its coast. From The Boston Globe, “In the colder waters off the coast of Maine, lobstermen have been hauling in record catches. But south of Cape Cod, where rising sea temperatures have contributed to the decimation of the lobster population, the industry has collapsed. In some areas, catches have plunged 90 percent below their peak in the late 1990s, leaving scant hope that a once-storied fishery can recover.”

Best. Christmas. Gift. Idea. Ever
If you’re a carnivore then this is an item you’ll wan tot add to your Christmas list this year. A $2,600 nine pound box of wagyu beef. From Food & Wine, “This bento box is an entire Japanese beef experience. First, the actual box—which is nearly two feet wide, constructed from solid wood and weighs about 33 pounds when filled—has compartments in the shape of a cow with each one approximately corresponding to the cut of beef it contains including prime rib, tenderloin, sirloin tip, brisket, chuck tender, tongue and temple.”

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.