What’s All The Fuss About

If you own last year’s laggards you are probably wondering what all the fuss over the market is about.  It has been tough sledding for the leaders so far this year as they have underperformed the laggards by quite a bit.  In one of the models we track, the laggards moved in to positive territory with yesterday’s price action!

We track a model of the S&P 500 Sub-Industry Groups that is broken into quintiles.  All of the holdings in the S&P 500 are assigned to one of the 130 GICS sub industry groups.  We then rank those sub groups using relative strength and assign to one of five quintiles.  Each month we repeat the process and equally weight all the sub groups in each quintile.  We wrote a white paper about the process a couple of years ago that can be accessed here.

So far this year the worst quintile is positive and outperforming the best quintile by over 6%.  That is quite a change from last year when the worst quintile got smashed and the other four quintiles all performed about the same.

Capture

Although this kind of performance happens from time to time, it certainly isn’t the norm.  If we look at the top quintile versus the bottom quintile over time you can see the dramatic outperformance of the best over the worst groups.Sub Industry Performance

Any strategy that buys the leaders probably isn’t doing too well this year.  This happens from time to time.  The long term results certainly favor owning the best groups and avoiding the worst groups.

The performance above is based on total return, inclusive of dividends, but does not include transaction costs.  Performance updated through 2/17/16.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

Some performance information presented is the result of back-tested performance.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period. The hypothetical returns have been developed and tested by DWA, but have not been verified by any third party and are unaudited. Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight. Model performance data (both backtested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

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