A Wealth of Common Sense makes a good point as it relates to sector leadership over the past couple of years:
The best performer over this period was the consumer discretionary sector. One of the narratives following the financial crisis was that the consumer was tapped out from the debt overhang. From 2009-13, consumer discretionary stocks were up nearly 240% versus the S&P’s gain of roughly 130% (Although that trend has finally reversed this year).
So much for that market narrative! It sounded good at the time, but the Consumer Discretionary sector has been a strong outperformer over the last couple of years.
Allocations to the PowerShares DWA Momentum ETF (PDP), of course, pay no attention to market narratives. Rather, allocations to this index are based solely on relative strength.
Source: Dorsey Wright
As shown above, the Consumer Discretionary sector has shown some signs of deterioration this year, so it is possible that when PDP goes through its next quarterly rebalance at the end of the quarter that the exposure to Consumer Discretionary stocks will drop (it is also possible that they will rebound from here and regain a leadership position).
However, the broader point is a good one—beware of market narratives.
A relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss. Dorsey Wright & Associates is the index provider for the suite of Momentum ETFs with PowerShares. See www.powershares.com for more information. A list of all holdings for the trailing 12 months is available upon request.
HT: Abnormal Returns
