A Check-in on Market Leadership

A Check-in on Market Leadership

Posted on March 02, 2021
Rotation is a law in the markets.  Every liquid security will have periods of outperformance and periods of underperformance.  We have mentioned this in prior updates, but small caps have largely been outperforming large caps this year, and value has been outperforming growth.  This has not been the case for largely the last two years.

The reason we have seeing growth lag value over the last few months is due to the relative weakness that Technology has shown.  Technology-related stocks are largely considered growth stocks and are no longer leading the markets.  In fact, looking at Canterbury’s risk-adjusted strength rankings, the leadership appears foreign.  For the last few years, the Technology sector has been atop the rankings of the S&P 500 sectors, but today sits at 7/11 sectors. Communications (which has mostly technology stocks) does sit at #3, but Consumer Discretionary, which is 40% weighted towards Amazon and Tesla, has fallen substantially.  At the start of the year, it was the top-rated sector, but now sits at the #8 spot. 

So, that brings us to the question “what is leading the markets?”  Well, the combination of leadership has been seldom seen over the last 2 years.  Currently, the Financial Sector ranks #1, followed by Energy.  Energy has been ranked in the bottom tier for the vast majority of the last few years.  We are also seeing real estate make a rise up the rankings. The table below shows the 11 S&P 500 sector and where they currently rank on a risk-adjusted basis, as well as where they ranked to start the year.
Sector Current Risk Adjusted Rank (2/26/2021) Rank on 1/1/2021 Change
Financials 1 4 +3
Energy 2 9 +7
Communications 3 6 +3
Industrials 4 2 -2
Real Estate 5 11 +6
Basic Materials 6 5 -1
Technology 7 3 -4
Discretionary 8 1 -7
Healthcare 9 8 -1
Utilities 10 10 0
Staples 11 7 -4
Source: CIM

What About Alternatives?
The alternative markets are very interesting right now.  It has not been a good time to be invested in bonds, particularly treasury bonds.  Twenty-year treasury bonds are down -17% since their peak in August and have a higher volatility than the S&P 500.  Gold has not been any better, also off -17% from its August peak, even though it has shown no correlation to bonds over the last 6 months (source: AIQ).  Below is a chart of gold and twenty-year treasuries.

Source: AIQ

Currently, Canterbury’s risk adjusted strength indicators are showing strength in Copper, Steel, and a recent a surge in oil.

Bottom Line
The markets are seeing strength in areas that have not been strong for a few years.  Technology stocks, which account for 40% of the S&P 500, have been relatively weaker since the start of the new year.  If you look at charts of Facebook, Apple, and Amazon, which are 3 of the top 6 largest S&P 500 stocks, they are flat to down over the last 6 months.  Meanwhile, the energy sector, which reached a historic low in terms of S&P 500 weighting a few months ago (due to prior poor performance), is now the second strongest sector.  “Safe havens” like Gold and Bonds have struggled and have higher volatility than many equity indexes.

The point here is that all securities will go through bull and bear markets.  That is why at Canterbury, we are adaptive.  The Canterbury Portfolio Thermostat is designed with the principle that markets are always changing and shifting leadership.  Over the last few years, the markets have been dominated by big tech stocks.  Today, the story is a little different.  The Portfolio Thermostat is able to rotate to asset classes showing risk adjusted strength, like financials, oil, copper, and even inverse bonds (which do well when bonds are in a bear market like they are today).  As market environments change, the portfolio will adapt.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.