In this short market commentary, we will discuss:
· “So Goes January, So Goes the Year”
· US Sector Leadership
· International Market Strength
The January Barometer
You will probably be hearing a phrase similar to “so goes January, so goes the year.” The old trading adage was developed in 1972 by Yale Hirsch, author of the “The Stock Trader’s Almanac.” The whole premise behind the “January Barometer” is that if January is an up month, then the market will end up for the year. The theory also places emphasis on the first five trading days of the new year. If the first five days of the year are up, then there is a higher likelihood of the calendar year ending up.
The January Barometer naturally has some critics, us being one of them. Bottom line there just aren’t enough data points to support the theory as anything other than pure coincidence. Nonetheless, it does give the news something to talk about.
No one has a working crystal ball. That being said, the first five days of January did end up for the S&P 500. What is funny about that is that most all of that came from a +2.25% single up-day on Friday. Almost every other day last week opened to the upside, before a wave of selling kicked in. Remember, this is still a bear market, marked by high volatility. Large “up” days have been just as frequent as large “down” days. Disregard seasonal trends, and don’t get hung up in why the market goes up or down on any given day. Bear markets can make rational investors make irrational decisions.
Market leadership in 2022 stacked up in reverse from what it was in 2021. In a healthy market, the Nasdaq would generally lead the S&P 500, which would lead the Dow Jones. That was the case for 2021. In 2022, the opposite occurred. The Dow outperformed the technology-heavy Nasdaq and had about half of the volatility. As a result, sector leadership has flipped from what it had been in years prior to 2022.
Out of 11 US sectors, Industrials, Energy, and Financials hold the top spots on Canterbury’s risk adjusted rankings. Meanwhile, Information Technology, Communications, and Consumer Discretionary (which has heavy exposure to Amazon and Tesla) round out the bottom of the sector ranks.
Fortunately, with all the innovative investment tools available today, such as ETFs, Portfolio Management can include more than just the US markets. At Canterbury Investment Management, our system generates reports on more than 200 ETFs (Exchange-Traded-Funds). Looking at the top risk adjusted rankings of these funds, nine of the top eleven are internationally based ETFs. In other words, international markets are showing risk-adjusted strength compared to US markets to begin 2023.
Bottom Line- Here is what is important
As we analyze current market trends, we know that this is still a bear market, which can be volatile and unpredictable. Defensive sectors continue to lead into the new year, and we are also starting to see some strength coming from international stocks.
More important than analyzing trends, is having a plan to navigate a volatile, everchanging market. That is why at Canterbury, we employ an Adaptive Portfolio Management methodology, called the Canterbury Portfolio Thermostat. The goal of the Thermostat is to adapt to changing market conditions and ultimately benefit from market volatility by having effective diversification.
The Portfolio Thermostat currently holds positions in the risk-adjusted leading sectors like Industrials and Energy, as well as has exposure to international stocks and alternatives like gold. At the same time, the Thermostat and inverse positions to weaker market segments like Technology and Real Estate to stabilize portfolio fluctuations.