Tag: investing

We can tackle climate change, jobs, growth and global trade. Here’s what’s stopping us

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“We must leave behind established modes of thinking and seek creative workable solutions.”

Another tumultuous year has confirmed that the global economy is at a turning point. We face four big challenges: the climate transition; the good-jobs problem; an economic-development crisis, and the search for a newer, healthier form of globalization.

To address each, we must leave behind established modes of thinking and seek creative workable solutions, while recognizing that these efforts will be necessarily uncoordinated and experimental.

Climate change is the most daunting challenge, and the one that has been overlooked the longest — at great cost. If we are to avoid condemning humanity to a dystopian future, we must act fast to decarbonize the global economy. We have long known that we must wean ourselves from fossil fuels, develop green alternatives and shore up our defenses against the lasting environmental damage that past inaction has already caused. However, it has become clear that little of this is likely to be achieved through global cooperation or economists’ favored policies.

Instead, individual countries will forge ahead with their own green agendas, implementing policies that best account for their specific political constraints, as the United States, China and the European Union have been doing. The result will be a hodge-podge of emission caps, tax incentives, research and development support, and green industrial policies with little global coherence and occasional costs for other countries. Messy though it may be, an uncoordinated push for climate action may be the best we can realistically hope for.

“Inequality, the erosion of the middle class, and labor-market polarization have caused significant damage to our social environment. ”

But our physical environment is not the only threat we face. Inequality, the erosion of the middle class, and labor-market polarization have caused equally significant damage to our social environment. The consequences are now widely evident. Economic, regional, and cultural gaps within countries are widening, and liberal democracy (and the values that support it) appears to be in decline, reflecting rising support for xenophobic, authoritarian populists and the growing backlash against scientific and technical expertise.

Social transfers and the welfare state can help, but what is most needed is an increase in the supply of good jobs for the less-educated workers who have lost access to them. We need more productive, well-remunerated employment opportunities that can provide dignity and social recognition for those without a college degree. Expanding the supply of such jobs will require not only more investment in education and more robust defense of workers’ rights, but also a new brand of industrial policies for services, where the bulk of future employment will be created.

The disappearance of manufacturing jobs over time reflects both greater automation and stronger global competition. Developing countries have not been immune to either factor. Many have experienced “premature de-industrialization”: their absorption of workers into formal, productive manufacturing firms is now very limited, which means they are precluded from pursuing the kind of export-oriented development strategy that has been so effective in East Asia and a few other countries. Together with the climate challenge, this crisis of growth strategies in low-income countries calls for an entirely new development model.

“Governments will have to experiment, combining investment in the green transition with productivity enhancements in labor-absorbing services.”

As in the advanced economies, services will be low- and middle-income countries’ main source of employment creation. But most services in these economies are dominated by very small, informal enterprises — often sole proprietorships — and there are essentially no ready-made models of service-led development to emulate. Governments will have to experiment, combining investment in the green transition with productivity enhancements in labor-absorbing services.

Finally, globalization itself must be reinvented. The post-1990 hyper-globalization model has been overtaken by the rise of U.S.-China geopolitical competition, and by the higher priority placed on domestic social, economic, public-health, and environmental concerns. No longer fit for purpose, globalization as we know it will have to be replaced by a new understanding that rebalances national needs and the requirements of a healthy global economy that facilitates international trade and long-term foreign investment.

Most likely, the new globalization model will be less intrusive, acknowledging the needs of all countries (not just major powers) that want greater policy flexibility to address domestic challenges and national-security imperatives. One possibility is that the U.S. or China will take an overly expansive view of its security needs, seeking global primacy (in the U.S. case) or regional domination (China). The result would be a “weaponization” of economic interdependence and significant economic decoupling, with trade and investment treated as a zero-sum game.

“The biggest gift major powers can give to the world economy is to manage their own domestic economies well.”

But there could also be a more favorable scenario in which both powers keep their geopolitical ambitions in check, recognizing that their competing economic goals are better served through accommodation and cooperation. This scenario might serve the global economy well, even if — or perhaps because — it falls short of hyper-globalization. As the Bretton Woods era showed, a significant expansion of global trade and investment is compatible with a thin model of globalization, wherein countries retain considerable policy autonomy with which to foster social cohesion and economic growth at home. The biggest gift major powers can give to the world economy is to manage their own domestic economies well.

All these challenges call for new ideas and frameworks. We do not need to throw conventional economics out the window. But to remain relevant, economists must learn to apply the tools of their trade to the objectives and constraints of the day. They will have to be open to experimentation, and sympathetic if governments engage in actions that do not conform to the playbooks of the past.

Dani Rodrik, professor of international political economy at Harvard Kennedy School, is president of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).

This commentary was published with the permission of Project Syndicate — Confronting Our Four Biggest Economic Challenges

More: Biden administration’s antitrust victories are much-needed wins for consumers

Also read: ‘Dr. Doom’ Nouriel Roubini: ‘Worst-case scenarios appear to be the least likely.’ For now.

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The Hoax of Modern Finance – Part 4: Misuse of Statistics and Other Controversial Practices

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Note to the reader: This is the fourth in a series of articles I’m publishing here taken from my book, “Investing with the Trend.” Hopefully, you will find this content useful. Market myths are generally perpetuated by repetition, misleading symbolic connections, and the complete ignorance of facts. The world of finance is full of such tendencies, and here, you’ll see some examples. Please keep in mind that not all of these examples are totally misleading — they are sometimes valid — but have too many holes in them to be worthwhile as investment concepts. And not all are directly related to investing and finance. Enjoy! – Greg

The Deception of Average

The World of Finance is fraught with misleading information.

The use of averages, in particular, is something that requires discussion. Figure 4.1 shows the compounded rates of return for a variety of asset classes. If I were selling you a buy-and-hold strategy, or an index fund, I would love this chart. Looking at the 85 years of data shown here, I could say that, if you had invested in small-cap stocks, you would have averaged 11.95 percent a year, and if you had invested in large-cap stocks, you would have averaged 9.85 percent a year. And I would be correct.

Figure 4.1

I think that most investors have about 20 years, maybe 25 years, in which to accumulate their retirement wealth. In their 20s and 30s, it is difficult to put much money away for many reasons, such as low incomes, children, materialism, college, and so on. Therefore, with that information, what is wrong with this chart? It is for an 85-year investment, and people do not have 85 years to invest. As said earlier, most have about 20 years to acquire their retirement wealth. and there are many 20-year periods in this chart where the returns were horrible. The bear market that began in 1929 did not fully recover until 1954, a full 25 years later; 1966 took 16 years to recover, 1973 took 10 years, and, as of 2012, the 2000 bear still had not recovered.

Table 4.1 shows the performance numbers for the asset classes shown in Figure 4.1 (LT—Long Term, IT—Intermediate Term). The cumulative numbers in Table 4.1 begin at 1 on December 31, 1925.

Table 4.1Hint: Be careful when someone uses inappropriate averages; or more accurately, uses averages inappropriately.

In Table 4.1, recall how the small-cap and large-cap compounded returns were about 12 percent and 10 percent, respectively. Figure 4.2 shows rolling 10-year returns by range since 1900. A rolling return means it shows the periods 1900–1909, 1901–1910, 1902–1911, and so on. You can clearly see that the small stock and large stock returns depicted in Table 4.1 fall within the middle range (8 percent–12 percent) in Figure 4.2, yet, of all the 10-year rolling periods, only 22 percent of them were in that range. Often, average is not very average. It reminds me of the story of the six-foot-tall Texan that drowned while wading across a stream that averaged only three-feet deep.

Figure 4.2

Another (and final) example shows how easily it is to be confused over what is average. And, of course, this time it is intentional. This example should put it in perspective. You cannot relate rates of change linearly. In Figure 4.3 , point A is 20 miles from point B. If you drive 60 mph going from point A to point B, but returning from point B to point A, you drive 30 mph. What is his average speed for the time you were on the road?

A. 55 mph

B. 50 mph

C. 45 mph

D. 40 mph

Figure 4.3

Many will answer that it is 45 mph ((60mph + 30mph)/2). However, you cannot average rates of change like you can constants and linear relationships. Distance is rate multiplied by time (d = rt). So time (t) is distance (d)/rate (r). The first leg from A to B was 20 miles divided by 60 mph or one-third of an hour. The second leg from B to A was 20 miles divided by 30 mph or two-thirds of an hour. Adding the two times (1/3+2/3 = 1 hour) will mean you traveled for one hour and covered a total distance of 40 miles, which has to mean the average speed was 40mph. Look up harmonic mean if you want more information on this, as it is the correct method to determine central tendency of data when it is in the form of a ratio or rate.

Figure 4.4 shows the 20-year rolling price returns for the Dow Industrials. The range of returns in this 127-year sample (1885–2012) is from a low on 08/31/1949 (of .3.71) percent to a high on 3/31/2000 (of 14.06 percent), a 17.77 percent range.

To help clarify rolling returns, if investors were in the Dow Industrials from 9/30/1929 until 8/31/1949 (the low mentioned previously), they had a return of .3.71 percent. Complementary, if they invested on 4/30/1980, then, on 3/31/2000, they had a return of 14.06 percent. The mean return is 5.2 percent and the median return 4.8 percent. When median is less than mean, it simply means more returns were less average. If you recall the long-term assumptions that are often used in the first part of this chapter (Figure 4.1), you can see there is a problem. The magnitude of errors in assumptions of long-term returns cannot be overstated and certainly cannot be ignored. This variability of returns can mean totally different retirement environments for investors who use these long-term assumptions for future returns. It can be the difference between living like a king, or living on government assistance. Institutional investors have the same problems if using these long-term averages.

Figure 4.4

One of the primary beliefs developed by Markowitz in the 1950s as the architect of Modern Portfolio Theory was the details on the inputs for the efficient investment portfolio. In fact, his focus was hardly on the inputs at all. The inputs that are needed are expected future returns, volatility, and correlations. The industry as a whole took the easy approach to solving this by utilizing long-term averages for the inputs — in other words, one full swing through all the data that was available, and the average is the one used for the inputs into an otherwise fairly good theory. Those long-term inputs are totally inappropriate for the investing horizon of most investors; in fact, I think they are inappropriate for all human beings. While delving into this deeper is not the subject of this book, it once again brings to light the horrible misuse of average. These inputs should use averages appropriate for the investor’s accumulation time frame.

One If by Land, Two If by Sea

Sam Savage is a consulting professor of management science and engineering at Stanford University, and a fellow of the Judge Business School at the University of Cambridge. He wrote an insightful book, The Flaw of Averages, in 2009, wherein he included a short piece called “The Red Coats” that fits right into this chapter.

Spring 1775: The colonists are concerned about British plans to raid Lexington and Concord, Massachusetts. Patriots in Boston develop a plan that explicitly takes a range of uncertainties into account: The British will come either by land or by sea. These unsung pioneers of modern decision analysis did it just right by explicitly planning for both contingencies. Had Paul Revere and the Minutemen planned for the single average scenario of the British walking up the beach with one foot on the land and one in the sea, the citizens of North America might speak with different accents today.

Incidentally, Dr. Savage’s father, Leonard J. Savage, wrote the seminal The Foundation of Statistics in 1972 and was a prominent mathematical statistician who collaborated closely with Milton Friedman.

Everything on Four Legs Is a Pig

Although this is unrelated to investments and finance, it is a story about averages that offers additional support to this topic. Doctors use growth charts (height and weight tables) for a guide on the growth of a child. What folks do not realize is that they were created by actuaries for insurance companies and not doctors. As doctors began to use them, the terms overweight, underweight, obese, and so on were created based on average. So if your doctor says you are overweight and you need to lose weight, he is also saying you need to lose weight to be average. And from a Wall Street Journal article by Melinda Beck on July 24, 2012, “The wide variations are due in part to rising obesity rates, an increase in premature infants who survive, and a population that is growing more diverse. Yet the official growth charts from the Centers for Disease Control (CDC) and Prevention still reflect the size distribution of U.S. children in the 1960s, 1970s, and 1980s. The CDC says it doesn’t plan to adjust its charts because it doesn’t want the ever-more-obese population to become the new norm.” And now you know.

During my last physical examination, I told my doctor about how these charts on height and weight were just large averages created by actuaries for insurance companies, and that I did not mind being above average. The chapter that follows focuses on the multibillion-dollar industry of prediction. I rarely am invited to be on the financial media anymore because I refuse to make a prediction; it is a fool’s game.

Thanks for reading this far. I intend to publish one article in this series every week. Can’t wait? The book is for sale here.

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Hot Jobs Data Sends Stock Market Seesawing, Ending Nine-Week Winning Streak

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KEY

TAKEAWAYS

  • The stock market indices closed higher for the day but ended the week lower
  • The 10-year Treasury yield closed higher at 4.04%
  • In spite of the pullback in equities, the stock market indices are still looking technically strong

You can’t blame the market for taking a breather after nine positive weeks.

The first trading week in January ended lower, which may have concerned investors. It’s understandable how jittery investors are when you view the market’s reaction to the December jobs report. The jobs data came in better than expected, which sent ripples through Wall Street. Right after the data was reported, equity futures fell, and Treasury yields ticked higher.

However, investors overcame the shock after digesting the info and looking more closely at the data. And the lower-than-expected ISM number, plus factoring in two major strikes and their impact on the jobs numbers, calmed investors for a short while. Equities turned higher, and Treasury yields dropped. The market continued to seesaw between gains and losses throughout the trading day.

Don’t be surprised if the market exhibits similar behavior next week, as investors await December CPI data and the start of earnings season. This doesn’t happen till the end of the week, so expect more of the same until Thursday.  

According to the CME FedWatch Tool, the probability of an interest rate cut in the March Fed meeting is at 64%, lower than before today’s data was released. 2024 is a 50-50 year, with elections and the Fed’s interest rate. Elections are going to take place in several countries around the world. And with over half the world’s population heading to the polls this year, it’s bound to bring some volatility to the stock market.

From a seasonal perspective for the US market, the first quarter of an election year tends to be volatile. There’s a chance that stocks could sell off ahead of the elections, but generally trend higher after the elections. And while 2023 performed as expected, seasonally, it doesn’t mean you should sit back and expect your portfolio to grow at the end of the year. Keep a watch on the broader market.

Given the S&P 500 index ($SPX) has been trending higher, trading above its 50-month simple moving average and showing a relatively steep uptrend since 2022 (see chart below), a correction shouldn’t be worrisome until the index nosedives below critical support levels.

CHART 1. MONTHLY CHART OF S&P 500. The index has been trending higher since 2012 and, except for a few instances, staying above its 50-month simple moving average. A break below the blue dashed uptrend line could be the first indication of a reversal.Chart source: StockCharts.com. For educational purposes.

We have seen a rotation in leadership from Technology to Financials and Health Care, two sectors that struggled last year. The hope of lower interest rates likely boosted the Financials, which have seen a sharp upside rally since early November. The Health Care sector saw a similar move as Financials, though it pulled back a bit on Friday.

CHART 2. DAILY CHART OF FINANCIAL SELECT SECTOR SPDR ETF (XLF). After yields started falling, the Financials started recovering and rallied strongly.Chart source: StockCharts.com. For educational purposes.

But that doesn’t mean the Magnificent Seven will lose their status symbol. Although it closed off its high, Nvidia Corp. (NVDA) showed signs of recovering today. NVDA’s stock still has a strong chart, maintaining support of its 50-day SMA. If the stock continues to rally in 2024, it could pull the rest of the market with it, especially the other six stocks that closely follow behind. So don’t lose faith in the mega-cap tech stocks just yet.

CHART 3. NVIDIA STOCK IS STILL BULLISH. Don’t give up on the Magnificent Seven stocks; they could still rally higher.Chart source: StockCharts.com. For educational purposes.

It’s not out of reach for Treasury yields to fall lower, as the Fed is expected to lower rates. Lower interest rates could see growth stocks pull back, but how much lower are interest rates likely to go?

As long as the economy keeps chugging along, the expectations the market has priced in will probably hold. But that doesn’t mean interest rates will fall close to zero; more likely, they will pull back, and then probably settle at around the 3% level. A lot has to do with the balance between interest rates and economic growth.

On a closing note, small-cap stocks could show strength as rates fall. Keep an eye on a chart of the small caps vs. large caps in 2024, such as the one below of iShares Russell 2000 ETF vs. the SPDR S&P 500 ETF (IWM:SPY).

CHART 4. SMALL CAPS VS. LARGE CAPS. If the small caps start outperforming the large caps and trend higher, you may want to put more weight on small-cap stocks.Chart source: StockCharts.com. For educational purposes.

If there’s a clear rotation and investors gravitate toward small-cap stocks, it may be worth adding more weight to this asset class.

End-of-Week Wrap-Up

  • $SPX up 0.18% at 4697.24, $INDU up 0.07% at 37,466.11; $COMPQ up 0.09% at 14524.07
  • $VIX down 5.52% at 13.35
  • Best performing sector for the week: Health Care
  • Worst performing sector for the week: Technology
  • Top 5 Large Cap SCTR stocks: Affirm Holdings (AFRM); USX-US Steel Group (X); Coinbase Global (COIN); PDD Holdings (PDD); Karuna Therapeutics (KRTX)

On the Radar Next Week

  • December CPI
  • December PPI
  • Earnings season kicks off with Bank of America (BAC), JP Morgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), Delta Airlines (DAL), and more.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

Jayanthi Gopalakrishnan

About the author:
Jayanthi Gopalakrishnan is Director of Site Content at StockCharts.com. She spends her time coming up with content strategies, delivering content to educate traders and investors, and finding ways to make technical analysis fun. Jayanthi was Managing Editor at T3 Custom, a content marketing agency for financial brands. Prior to that, she was Managing Editor of Technical Analysis of Stocks & Commodities magazine for 15+ years.
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Ready Yourself for 2024 With Macro to Micro Analysis

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For the new year, we have given you an extensive 3-pronged look at the markets.

First, we have the general outlook for the economy and markets through the Outlook 2024. This is the general outlook for 2024, including the recap of 2023 and how the predictions I made then played out. It includes a comparison in inflation and disinflation patterns of the 1970s and now. It also includes all the indices and the general outlook for key sectors and the bonds, dollar, metals, and so on.

Moreover, we look at the Economic Modern Family and their outliers through charts and analysis. Also included are overall trends to watch, plus picks.

One other area I cover in the Outlook 2024 is the teachings of Raymond Lo and how he sees the upcoming Year of the Dragon. Part of my comments on his analysis is based on this statement by Lo:

“Many has the misunderstanding that the Dragon is glamorous auspicious animal and will always bring good luck. To the contrary, Dragon and Dog in the 12-animal system is called the “Gate to Heaven and Hell” or the “Net of Heaven and Hell”.

General Thoughts

2024 could see gains; however, we are agnostic and definitely looking to charts. SPY needs to hold 4600 as our line in the sand, and small caps need to hold over 2000. Plus, in January, we will have a 6-month calendar reset this year with the election; instruments that fail the calendar range lows could set the stage for a broader selloff, while instruments that rally above the calendar range highs can be the bigger winners, at least for the first half of the year. Nonetheless, we have keen eyes on junk bonds, which, despite rallying, have well underperformed the indices. If they hold, great; if not, we take that as a warning.

With the anticipation of Fed lowering rates multiple times, we also want to see Fed Fund rates stabilize and not fall too dramatically, as those could be the signs of recession that we seemingly avoided in 2023. Additionally, we expounded with Daily newsletters.

From Gold and Silver

For last year’s Outlook, I wrote:

Perhaps our biggest callout for a major rally in 2023 is in gold.

Here we are over $2000 and, although gold has not doubled in price, it did rise by 25%.

For 2024, we stay with our call for higher gold prices. I am looking for a move to $2400, provided gold continues to hold $1980.

That statement was from December 1st. To add to that statement:

Trends for 2024 — Gold and Silver start their Last Hurrah.

From 17 Predictions

With certain areas of inflation coming down, although still higher than what numbers suggest, the discussion of the rate hike cycle at the end is controversial. Statistically, there has been a major financial failure at the end of each rate hike cycle since 1965.

Currently, the catalyst for financial stress could be the rising debt, rising spending, geopolitical issues impacting supply chain and a contentious election year. And anything that gooses inflation will stop the Fed from cutting.

January 2024 will see a new 6-month calendar range reset — it will be very important this time, with many predicting the end of the first quarter with a selloff. Although the stats are on the side of a higher market, this year of the dragon suggests some irritation that could turn the market on its side with more volatility.

To be prepared check out our predictions.

From The Vanity Trade 2024: All About Me!

According to Wikipedia, “Self-help or self-improvement is a self-directed improvement of oneself—economically, physically, intellectually, or emotionally—often with a substantial psychological basis.”

In the Outlook 2024, I quote Raymond Lo yet again,

“The Dragon is considered a ‘Star of Arts.’ The industries that will perform better in the Year of the Dragon will be related to the Metal and Wood elements. Metal industries are beauty and skin care; wood industries are media, fashion….”

This got me thinking about the consumer and the habits of 2023 and how they could continue or change in 2024.

With disposable income still quite high, consumers who spent the last half of 2023 in YOLO or revenge spending go into vanity mode in 2024.

Fashion, beauty, skincare, elective surgeries, self-help, diet drugs, and maybe dating stocks do well.

This daily includes lots of picks to put on your radar.

Click this link to get your free copy of the Outlook 2024 and stay in the loop!

Thank you, all my loyal readers, followers, clients and colleagues, for making 2023 so successful. Here is to a VERY HEALTHY, HAPPY and PROSPEROUS NEW YEAR!!!

This is for educational purposes only. Trading comes with risk.

If you find it difficult to execute the MarketGauge strategies or would like to explore how we can do it for you, please email Ben Scheibe at [email protected], our Head of Institutional Sales. Cell: 612-518-2482.

For more detailed trading information about our blended models, tools and trader education courses, contact Rob Quinn, our Chief Strategy Consultant, to learn more.

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Get your copy of Plant Your Money Tree: A Guide to Growing Your Wealth.

Grow your wealth today and plant your money tree!

“I grew my money tree and so can you!” – Mish Schneider

Follow Mish on X @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish and team look at 2023 and make several predictions on commodities and trends for 2024 and vanity stocks in Benzinga Pre Market Prep.

Mish discusses gold, silver and why self care and “all about me” can trend in 2024 in this video from Yahoo! Finance.

Coming Up:

January 2: The Final Bar with David Keller, StockCharts TV & Making Money with Charles Payne, Fox Business & BNN Bloomberg

January 3: Real Vision IP Group Special Presentation

January 5: Daily Briefing, Real Vision

January 22: Your Daily Five, StockCharts TV

January 24: Yahoo! Finance

Weekly: Business First AM, CMC Markets

  • S&P 500 (SPY): 480 all-time highs, 460 underlying support.
  • Russell 2000 (IWM): 200 pivotal.
  • Dow (DIA): Needs to hold 370.
  • Nasdaq (QQQ): 410 pivotal.
  • Regional Banks (KRE): 47 support, 55 resistance.
  • Semiconductors (SMH): 174 pivotal support to hold this month.
  • Transportation (IYT): Needs to hold 250.
  • Biotechnology (IBB): 130 pivotal support.
  • Retail (XRT): The longer this stays over 70.00 the better!

Mish Schneider

MarketGauge.com

Director of Trading Research and Education



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#Ready #Macro #Micro #Analysis

These ETF strategies won big in 2023. How one analyst sees them doing next year.

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Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at ETF strategies that have exploded in popularity in 2023, and whether they will continue to gain momentum in the year ahead.

Please send tips or feedback to [email protected] or to [email protected]. You can also follow me on X at @Isabelxwang and find Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

U.S. exchange-traded funds have had a strong 2023, attracting around $580 billion in net inflows with assets climbing to a record $8.1 trillion as of December 27, according to FactSet data.

ETFs tracking the large-cap benchmark S&P 500 index
SPX,
which has risen 24.6% this year, have seen the strongest net inflows in 2023 among the nearly 700 funds MarketWatch tracks, according to FactSet data.

The SPDR S&P 500 ETF Trust
SPY,
the world’s largest and oldest ETF with $493 billion assets under management, has recorded the largest net inflows of over $47 billion this year to date, followed by the Vanguard S&P 500 ETF’s
VOO
$41 billion and the iShares Core S&P 500 ETF’s
IVV
$36 billion over the same period, according to FactSet data. 

In terms of year-to-date performance, technology-related stock funds have shown a remarkable turnaround in 2023 after facing a tumultuous bear market the year before. Some of the ETFs tracking the tech-heavy Nasdaq 100 index
NDX
as well as semiconductor stocks are on pace to finish 2023 with gains of more than 50%, thanks to the rise of the “Magnificent Seven” stocks.

The Fidelity Blue-Chip Growth ETF
FBCG
has jumped 58.7% in 2023 to become the best-performing U.S. fund, excluding ETNs and leveraged products, according to FactSet data. The WisdomTree U.S. Quality Growth Fund
QGRW
is up 56.2% this year, while the Invesco QQQ Trust Series I
QQQ
has risen 55.6% in 2023. Gains in all of these funds were fueled by a massive rally in mega-cap technology stocks such as Apple Inc.
AAPL,
+0.22%
and Nvidia Corp.
NVDA,
+0.21%,
which have surged 49% and 239% this year, respectively, according to FactSet data. 

Will these ETF strategies continue to thrive in 2024? Will others emerge to deliver greater returns next year? Here’s how one CFRA ETF analyst sees things shaping up in the new year. 

Tech-driven growth ETFs will continue to stand out in 2024

The recent strong performance of technology and growth-driven ETFs is likely to continue in 2024, although with higher volatility, according to Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA. 

The table below summarizes the best performing ETF sub-categories in 2023, excluding leveraged and inverse ETFs. The best ETF sectors have featured tech- and growth-related themes like fintech, cryptocurrency, semiconductors, software and the metaverse. “These themes are very likely to continue to have a strong year in 2024,” said Ullal.

SOURCE: CFRA ETF DATABASE, DATA AS OF DECEMBER 18, 2023

One concern for investors is whether ETFs linked to technology sectors can continue to appreciate in 2024. But CFRA’s analysts think that some of the largest tech firms have strong balance sheets and cash flows, so they should be “safe havens” with “a growth tilt” next year.

“Despite the AI-driven recent run-up, the tech sector is still growing into its multiple, and ETFs like the Technology Select Sector SPDR Fund
XLK
do not yet have frothy multiples,” Ullal said in a Friday client note. 

See: ‘Magnificent Seven’ up for another bull run? What to expect from technology stocks in 2024.

Meanwhile, the massive amounts of cash parked at U.S. money-market funds could also keep the bull-market rally chugging along next year.

As of December 20, there was still $5.9 trillion sitting in U.S. money-market funds, according to data compiled by the Investment Company Institute. But given the stock-market rally in 2023 and the “likely pivot” to interest-rate cuts next year by the Federal Reserve, Ullal and his team see investors moving money out of cash-like instruments and migrating back to 60/40 portfolios by increasing their equity exposure next year, he wrote. 

Continued growth in options-based ETFs

ETFs using options-based strategies, such as covered-call ETFs or defined-outcome ETFs, have exploded in popularity in 2023. They have “long-term staying power” in sustaining investor interest in the year ahead, said Ullal. 

Specifically, the largest U.S. covered-call ETF, the $31 billion JPMorgan Equity Premium Income ETF
JEPI,
has seen $13 billion in net inflows so far this year and is among the top-five funds attracting the most capital in 2023, according to FactSet data.

A covered-call ETF, or an option-income ETF, is a fund that uses an options strategy called covered-call writing to generate income through collecting premiums. In a covered-call trade, investors sell a call option on an asset they hold, which gives the buyer of the option the right, not the obligation, to purchase the asset from them at a specified “strike” price on or before a certain date.

When the price of the asset goes down and doesn’t reach the “strike” price before the expiration date, the call option will expire as buyers walk away, but investors could still keep the premium as their payout.

That’s why the covered-call strategy usually performs well in a sideways or choppy market environment, because investors will be compensated for giving up the upside in stocks with a higher options premium. 

More on covered-call ETF: This type of ETF is designed to hedge against volatility and help investors navigate a stormy stock market

Ullal attributed the growing popularity of options-based ETFs to the success of JEPI as well as ETF firms relentlessly expanding their covered-call and buffer-ETF suites in 2023, even though these strategies tend to underperform in a rapidly rising stock market. 

“The flows are probably moderate [in 2024] relative to what we’ve seen so far, but I don’t think the flows will be negative or this category will go away,” Ullal said in a follow-up interview with MarketWatch on Thursday. “What’s happening is there are investors who are willing to trade off or sacrifice some [stock] performance for income or downside protection.” 

With that backdrop, Ullal sees options-based ETF strategies continuing to grow in 2024, though they will be put to the test if the current bull-market trend continues. 

Also see: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

Emerging-markets ETFs without China-related drag

ETF investors may want to “unbundle” their emerging-market exposure by reconsidering China-related assets in their ETF portfolios, according to Ullal.

Having a high exposure to China in emerging-market holdings was challenging for ETF investors in 2023, as China significantly underperformed other emerging markets this year due to a slower-than-anticipated post-Covid economic recovery, weakness in the country’s property sector and geopolitical tensions with the U.S., Ullal said.

China exposure in two of the most popular emerging-market ETFs, the Vanguard FTSE Emerging Markets ETF
VWO
and the iShares Core MSCI Emerging Markets ETF
IEMG,
stands at 31% and 24.4%, respectively, according to FactSet data. In turn, VWO has risen 8.3% this year, while IEMG has climbed 10.7% in 2023.

Meanwhile, the SPDR S&P China ETF
GXC
has slumped 12.8% year to date, per FactSet data. But the iShares MSCI Emerging Markets ex China ETF
EMXC,
which has no China exposure, has advanced 18.9% over the same period.

One option for investors would be to calibrate their exposure by combining emerging-market ex-China ETFs like EMXC with China-focused ETFs, Ullal said.

Alternatively, investors could construct the EM sleeve of their portfolios with country-specific ETFs, or use active ETFs like the KraneShares Dynamic Emerging Markets Strategy ETF
KEM,
as that fund’s China exposure is dynamically adjusted based on fundamental, valuation, and technical signals, he added.

Rising demand and competition in active bond ETF category 

The U.S. fixed-income ETF sector is dominated by funds passively tracking Treasury bonds like the 10-year Treasury note
BX:TMUBMUSD10Y,
which has seen declining yields lately as discussions around the Fed’s interest-rate path, and a possible pivot to rate cuts, continue to take center stage heading into 2024.

But MarketWatch reported last week that demand for active bond ETFs has picked up, with Vanguard launching two new active bond funds earlier this month. The desire for active bond ETFs among the firm’s clients has grown significantly over the past two years, John Croke, Vanguard’s head of active fixed-income product management, told MarketWatch.

Meanwhile, the firms that dominate the indexed and active bond ETF categories are different, Ullal noted. In the indexed bond ETF category, Vanguard competes with traditional rivals BlackRock and State Street, while in the active bond ETF category where it is now expanding its footprint, Vanguard is competing with managers like JPMorgan, First Trust and PIMCO. 

“This competition will put pressure on the incumbent players, but will be good for investors, and will be an important trend to watch in the next year,” said Ullal.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers

 %Performance
AdvisorShares Pure U.S. Cannabis ETF
MSOS 		12.7
Amplify Transformational Data Sharing ETF
BLOK 		10.5
SPDR S&P Biotech ETF
XBI 		9.9
ARK Genomic Revolution ETF
ARKG 		8.3
ARK Innovation ETF
ARKK 		6.4
Source: FactSet data through Wednesday, Dec 27. Start date Dec 21. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.

…and the bad

Bottom Performers

 %Performance
iMGP DBi Managed Futures Strategy ETF
DBMF 		-2.9
Vanguard Total International Bond ETF
BNDX 		-2.2
iShares 20+ Year Treasury Bond BuyWrite Strategy ETF
TLTW 		-2.1
VanEck BDC Income ETF
BIZD 		-1.2
Vanguard Short-Term Inflation-Protected Securities ETF
VTIP 		-1.2
Source: FactSet data

New ETFs

  • TCW Group filed to convert its TCW Artificial Intelligence Equity Fund TGFTX into the TCW Artificial Intelligence ETF, and is seeking to convert its TCW New America Premier Equities Fund TGUSX into the TCW Compounders ETF, according to the fund’s prospectus filed with the Securities and Exchange Commission on Tuesday.

Weekly ETF Reads



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The Magnificent 7 dominated 2023. Will the rest of the stock market soar in 2024?

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2023 will go down in history for the start of a new bull market, albeit a strange one.

Despite some year-end catch-up by the rest of the S&P 500 index, megacap technology stocks, characterized by the so-called Magnificent Seven, have dominated gains for the large-cap benchmark
SPX,
which is up 23.8% for the year through Friday’s close.

That’s the result of “extreme speculation,” according to Richard Bernstein, CEO and chief investment officer of eponymously named Richard Bernstein Advisors. And it sets the stage for investors to take advantage of “once-in-a-generation” investment opportunities, he argued, in a phone interview with MarketWatch.

MarketWatch’s Philip van Doorn last week noted that, weighting the Magnificent Seven — Apple Inc.
AAPL,
-0.55%
 , Microsoft Corp.
MSFT,
+0.28%,
 Amazon.com Inc.
AMZN,
-0.27%,
 Nvidia Corp.
NVDA,
-0.33%,
 Alphabet Inc.
GOOG,
+0.65%

GOOGL,
+0.76%,
 Tesla Inc.
TSLA,
-0.77%,
 and Meta Platforms Inc. 
META,
-0.20%
— by their market capitalizations at the end of last year, the group had contributed 58% of this year’s roughly 26% total return for the S&P 500, and that’s down from a breathtaking 67% at the end of November.

The chart below shows that the percentage of stocks in the S&P 500 that have outperformed the index in the year to date remains well below the median of 49% stretching back to 1990:


Richard Bernstein Advisors

Meanwhile, the tech-heavy Nasdaq Composite
COMP
has soared more than 40% this year, while the more cyclically weighted Dow Jones Industrial Average
DJIA,
which hit a string of records this month, is up 12.8%.

The narrowness of the rally gave some technical analysts pause over the course of the year. They warned that that it was uncharacteristic of early bull markets, which typically see broader leadership amid growing confidence in the economic outlook.

Bernstein, previously chief investment strategist at Merrill Lynch, sees parallels with the late-1990s tech bubble, which holds lessons for investors now.

The market performance indicates investors have convinced themselves there are only “seven growth stories,” he said. It’s the sort of myopia that’s characteristic of bubbles.

The consequences can be dire. In the 1990s, investors focused on the economy-changing potential of the Internet. And while those technological advances were indeed economy-changing, an investor who bought the tech-heavy Nasdaq at the peak of the bubble had to wait 14 years to get back to break-even, Bernstein noted.

Today, investors are focused on the economy-changing potential of artificial intelligence, while looking past other important developments, including reshoring of supply chains.

“I don’t think anyone is arguing AI won’t be an economy-changing technology,” he said, “ the question is, what’s the investing opportunity.”

For his part, Bernstein argues that small-cap stocks; cyclicals, or equities more sensitive to the economic cycle; industrials; and non-U.S. stocks are all among assets poised to play catch-up.

“I don’t think one has to be overly sexy on this one…it may not make a huge difference as to how you decide to execute and invest” in those areas, he said. “There’s a bazillion different ways to play this.”

Those areas are showing signs of life in December. The Russell 2000
RUT,
the small-cap benchmark, has surged more than 12% in December versus a 4.1% advance for the S&P 500. The Russell still lags behind by a wide margin year to date, up 15.5%, or more than 8 percentage points behind the S&P 500.

Meanwhile, an equal-weighted version of the S&P 500
XX:SP500EW,
which incorporates the performance of each member stock equally instead of granting a heavier weight to more valuable companies, has also played catchup, rising 6.2% in December. It’s now up 11% in 2023, still lagging behind the cap-weighted S&P 500 by more than 8 percentage points.

Bernstein sees early signs of broadening out, but expects it to be an “iterative process.” What investors should be aiming for, he said, is “maximum diversification,” in direct contrast to 2023’s historically narrow market, which reflects investors rejecting the benefits of diversification and taking more concentrated positions in fewer stocks.

To be sure, while the Magnificent Seven-dominated stock-market rally has attracted plenty of attention, it doesn’t mean those individual stocks have been the sole winners in 2023.

“I will say, ‘magnificent’ is in the eye of the beholder,” said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview.

The seven stocks that account for such a large share of the S&P 500’s gains do so mostly due to their extremely “mega” market caps rather than outsize price gains. And that’s just, by definition, how market-cap-weighted indexes work, analysts note.

That doesn’t mean the megacap stocks are necessarily the best performers over 2023. While Nvidia, up 243%, and Meta, up 194%, top the list of year-to-date price gainers in the S&P 500, Apple Inc.
AAPL,
-0.55%
is only the 59th best performing stock, with a 49% gain. Combine that with a $3 trillion market cap, however, and Apple proves one of the biggest movers of the overall index.

What was bizarre about the 2023 rally wasn’t so much the megacap tech performance, Gordon said, but the fact that the rest of the market languished to such a degree until recently.

Clarity around the economic outlook and interest rates help clear the way for the rest of the market to play catch-up, he said. Fears of a hard economic landing have faded, while the Federal Reserve has signaled its likely finished raising rates and is on track to deliver rate cuts in 2024.

For stock pickers that didn’t latch on to the few winners, 2023 was brutal. Passive investors who just bought S&P 500-tracking ETFs should feel good.

So why not just chase the index? Bernstein argues that could spell trouble if the megacap names are due to falter. That could make for a mirror image of this year where gains for a wider array of individual stocks is offset by sluggish megacap performance.

Gordon, however, played down the prospect of “binary outcomes” in which investors sell megacaps and buy the rest of the market.

If troubled segments of the economy, such as the housing sector, recover in 2024, investors “could definitely see a scenario where the rest of the market catches up but it doesn’t have to be at the expense of highfliers,” he said.

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The Top Five Charts of 2023

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KEY

TAKEAWAYS

  • 2023 was dominated by mega cap growth stocks, but the fourth quarter saw a potential change as other sectors experienced renewed vigor.
  • Three breadth indicators provided great clarity to the up and down cycles over the course of the year, as extreme readings tended to coincide with major turning points.
  • Interest rates remain top of mind as a pullback in the Ten Year Treasury Yield certainly seemed to provide support to the recent rally for stocks.

The end of the year provides a natural opportunity to look back and reflect on what we learned over the last 12 months as investors. I very much enjoyed thinking about how to tell the story of this market in just five charts, and to be completely honest, the videos below include way more than that!

But as much we love to make things more complicated for ourselves, mindful investors know that simple is often the best approach. So, by boiling down this year into five major themes and using these charts as a starting point to a deeper analysis of each, I found it to be a rewarding and at times eye-opening experience.

You can access the full playlist of the Top Five Charts on our YouTube channel, and you are welcome to ChartList I used during the videos, which you can find right HERE!

Without further ado, here are the five charts I selected, along with descriptions and video links. I hope you can use these as inspiration for your own year-end process and performance review!

Chart #1: S&P 500

As Ralph Acampora told me years ago, “Always start with a simple chart of the S&P 500.” And it’s been a fascinating year to do so, with each quarter providing a unique experience for investors, including plenty of ups and downs.

Looking back, I’m struck by what a sideways market we experienced really through the end of May. The S&P started with a strong January, but subsequent months basically brought retests of previous highs and previous lows, and no real indication of bullishness or bearishness on the larger timeframe.

June’s breakout provided a perfect example of the bearish momentum divergence, as negative momentum into the July high indicated an exhaustion of buyers. I also find myself focusing in on the October low, which caused me to be quite bearish at the time. That was definitely one of my key lessons learned in 2023, especially the importance of recognizing a clear change of character in November.

Chart #2: Ten Year Treasury Yield

Back in January 2023, I was asked during an interview to identify the most important chart to watch in 2023. I answered this chart, the Ten Year Treasury Yield ($TNX), along with the value vs. growth ratio. My thesis was that many investors had not experienced a rising rate environment (including me!), so this could mean some painful lessons as value outperformed growth as interest rates pushed higher.

As the chart clearly shows, the Ten Year Yield going from around 4% to 5%, completing a long journey from almost zero rates not long ago, did not provide the tailwind for value stocks that I expected. What a beautiful testament to the benefits of including macroeconomic analysis as part of a holistic investment approach, but also the importance of focusing on the evidence of price itself. If the charts say growth is outperforming, I’m going to want to stick with growth until proven otherwise.

Chart #3: Market Breadth

Breadth analysis is an essential component to my analytical process, as it addresses the issues related to our growth-oriented benchmarks being dominated by a small number of mega-cap stocks.

This chart includes three different breadth indicators: the S&P 500 Bullish Percent Index, the Percent of Stocks Above the 50-day Moving Average, and the McClellan Oscillator. With the first two indicators at 80% and 90%, respectively, this suggests a potential exhaustion point to the current upswing, similar to what we observed in July 2023, November 2022, and August 2022.

Chart #4: Leadership Themes

I have been thinking of 2023 as the year of mega-cap growth, but this fourth chart that it actually wasn’t about growth over value, but rather large over small. Reviewing the nine Morningstar style boxes, it’s clear that, while growth did indeed outperform value, it was overall more of large vs. small story.

Large-cap growth has outperformed large-cap value by almost 900 basis points (nine percent), but has outperformed mid-cap and small-cap style boxes by around 1300 basis points. Our benchmarks have been powering higher, propelled by the strength of large-cap growth, and one of the most important questions for 2024 will be whether this stretch of domination will continue.

Chart #5: Bitcoin

Higher highs and higher lows make an uptrend. And while Bitcoin ($BTCUSD) did not show that general pattern in the middle of 2023, it started the year strong and certainly ended the year in a position of strength.

Bitcoin has nearly tripled in value since December 2022, starting with a significant rally into an April high. But from March through October, Bitcoin basically was rangebound between 25,000 and 31,000. I remember laying out a game plan, which involved following the price momentum fueling any exit from that range. Sure enough, in October, we witnessed an upside breakout inspired by renewed optimism for a potential announcement confirming new spot Bitcoin ETFs. While that news has not yet arrived, the bullish uptrend shows that investors remain eager for this huge potential catalyst.

During my years in the Fidelity Chart Room, I was often reminded that charts can tell the best stories about market history. And as each new year concludes, the charts can provide a fantastic report card for your performance, a history textbook filled with practical lessons for years to come, and a reminder of the value of technical analysis in helping us identify opportunities and manage risk.

I hope these discussions inspire you to have a thorough review session as we wrap 2023, and an honest assessment of how you can improve your investing toolkit in 2024.

Happy holidays, thank you for making StockCharts a part of your process, and I’ll look forward to more great charts and conversations in the new year!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

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The Hoax of Modern Finance – Part 3: Fictions Told to Investors

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Note to the reader: This is the third in a series of articles I’m publishing here taken from my book, “Investing with the Trend,” in article form here on my blog. Hopefully, you will find this content useful. Market myths are generally perpetuated by repetition, misleading symbolic connections, and the complete ignorance of facts. The world of finance is full of such tendencies, and here, you’ll see some examples. Please keep in mind that not all of these examples are totally misleading — they are sometimes valid — but have too many holes in them to be worthwhile as investment concepts. And not all are directly related to investing and finance. Enjoy! – Greg

Believable Misinformation in Investing

Remember in our previous articles how many of the things we learned when we were young simply are not true? How many things have you learned in regard to investing that also just might not be true? Well…

  • “Buy and hold is the only way to be successful in the stock market.”
  • “Dollar-cost averaging is a good technique.”
  • “Diversification will protect you from bear markets.”
  • “Compounding is the eighth wonder of the world.”
  • “You must remain invested at all times, or you will miss the 10 best days each year.”
  • “Average returns are never better than compounded returns.”
  • “Probability and risk are the same thing.”
  • “Equity asset allocation will protect you from bear markets.”
  • “Economists are good at predicting the market.”
  • “Chasing performance is a common technique.”

The Void of Accountability

How often do you watch economists and market experts in financial media (television, print, etc.) offer strong opinions on the future direction of the economy and the stock market? Do they ever present their track record? Never! In fact, if you pay close attention, you will see that most of the “experts” are gaining something from their appearance. I’m shocked and disappointed at the absolute certainty in which they deliver their prognostications.

Hiding Behind Statistics

Have you placed a bet on the market using the Super Bowl indicator?

The Super Bowl indicator is based on the premise that, if the Super Bowl champion came from the old AFL, now known as the AFC, then the year will bring a downtrend in the stock market, while a winner from the old NFL, now the NFC, will lead to a bull market. Hopefully, you have not made any market decision on this, as that is a classic example of data mining and, even then, with an inadequate amount of data. This is not uncommon, however, as analysts, the financial media, newsletter writers, bloggers, and so on are constantly using data-mined statistics to make or support their hypothesis.

Figure 2.1 is a histogram of the annual returns on the Dow Industrial Average since 1897. The returns on the left are the down years, and the ones on the right are the up years. The up years account for 66 percent of all the years, so, if I were selling you a buy-and-hold strategy or an index fund, I could point to this chart and say, “Look, the market is up 66 percent of the time,” and I would be correct. Is this actionable information? Of course not, it is only observable information. And it is good, because it helps one understand market history and statistics. But you can’t make an investment decision based on this information.

Let’s play a game. First of all, I promise you that it is a fair game; here are the rules: 

  • It will cost you $10 to play the game.
  • You can play as many times as you desire.
  • If you win, you will receive $1 million.
  • There are no tricks.
  • The honest mathematical probability of winning is 1 out of 6. Honest! No tricks!

Figure 2.1

How many want to play?

When I do this during a presentation, most folks raise their hands; a few don’t, but those are the ones that never raise their hand. I then announce that the game is Russian roulette, and ask, “How many want to play the game now?” No one raises their hands. I then ask, “What happened?” I changed your focus from these goofy statistics to the risk of playing the game, and when you found out the risk of playing, you were no longer interested. Most do not realize the difference between probability and risk. This is what you need to do with the market, analyze and assess the risk. Stop paying attention to the daily noise, and know the difference between actionable information and observable information.

You Must Remain Invested or You Will Miss the 10 Best Days of the Year

“You must remain invested, or you will miss the ten best days of each year.” How many times have you heard that? While the fact of this matter is true, it is an impossible task to determine the best days beforehand. Let’s turn it around and ask what happens if you miss the ten worst days each year.

Figure 2.2 shows the S&P 500 since 1979. The line that moves down and to the right is the line represents the “missing the ten best days” argument. Note that this analysis was about missing the 10 best (worst) days per year. Again, the argument is factual; it just isn’t realistic. The line that moves up and to the right is the one that “misses the 10 worst days.” Clearly, missing the 10 worst days gives a drastically better performance than missing the 10 best days. The two lines in the middle are the S&P 500 and the line representing “missing both the 10 best and 10 worst days,” which you can see are quite close.

Figure 2.2

I have done this analysis also using the Dow Industrial Average back to 1885, and the results are always the same. I have done this over many varying time periods, and again, the results are the same. So, the buy-and-hold pundits and the index investing pundits want to scare you into believing their methods are better. A few articles from now, the section “The Deception of Average” should be enough to convince you that there is something wrong with that type of thinking. The best days (worst days) in the market are nothing more than interesting statistical anomalies. The argument that missing the best days would reduce the final return of a buy-and-hold strategy is true, but it also provides no information regarding the question of whether one can time the market in that regard. Somewhat like a strawman argument.

Table 2.1 is the data on the “missing days” conundrum. All data is updated through December 31, 2012. All calculations are based solely on price performance with no adjustment for dividends or inflation. It should be clear that if it were possible, missing the worst days each year would be the better strategy. This might be a stretch, but because missing both best and worst outperforms buy and hold, I think it shows that missing bad market days is more important. It also shows that missing days of high volatility are good. However, the purpose here is to challenge the marketing of buy and hold, which uses the “missing the best days” argument.

Remember, the message is clear and simple: The name of the game is to miss the bad days a lot more than missing the good days. This will play out as this book moves along. Note that most of the best days happen during bad or bear markets, usually tied to an overreaction to a short-term panic decline (you will see this in Table 3.1 ).

Diversification Will Protect You?

The world of finance is locked into the risk category of nonsystematic, or diversifiable, risk, and they do a really good job of it. However, diversifiable risk is a small piece of the big risk pie. There are many trite sayings about diversification, one being: “The only thing going up in a bear market is correlation.” During big bear markets, correlations move rapidly toward one. This also means that most asset classes fail significantly during severe bear markets. The correlations among them move toward one, which means they become more and more correlated. Correlation is one of the primary components of modern portfolio theory. Diversification is a helpful tool, but it should only be employed to the point where its costs equal its benefits. 

You can see in the two charts, Figures 2.3 and 2.4 , that, during up markets, most asset classes are uncorrelated and exhibit significantly different returns. However, in the second chart (Figure 2.4 ), during big bear markets, those same asset classes performed almost identically to each other, which challenges the need for diversification.

Table 2.1: Best and Worst Days

The old saying goes, “Diversification works until it doesn’t.” The asset classes used in these two charts are shown in Table 2.2.

Diversification Works, as you can see in Figure 2.3 over the period from 2000 to October 2007…

Figure 2.3: Diversification Works. Chart courtesy of StockCharts.com

….Until it doesn’t, as you can see in Figure 2.4 over the period from October 2007 to August 2009.

Figure 2.4: Diversification Does Not Work. Chart courtesy of StockCharts.com.  

Table 2.2: Components of the Diversification Charts (Figures 2.3 and 2.4)

Dollar-Cost Averaging

Dollar-cost averaging is simply the act of making like dollar investments on a periodic basis, say every month or every quarter. It is sold as a technique because they want you to believe that no one can outperform the market. There are many papers written on this subject, and I don’t want to dwell on it. Dollar-cost averaging is very dependent on when you start the process. If you start the process at the top of the market, just prior to a large bear market, you will be buying all the way down, and this process could last a couple of years. Your average purchase price would probably be somewhere in the middle of the decline. A quick study of equivalent returns would tell you that the following bull move would need to go considerably higher than just halfway back up for you to just break even. In addition, it is also critical as to what periodic day or week you choose to make the investment. Should you do it quarterly and invest on the first day of the first week of the quarter, or something else?

The bottom line is that this process is subjected to unknown market risk, which can work for you but can also work against you. However, I think dollar-cost averaging is probably better than buy and hold, and it is certainly better than doing nothing, which might also be the same as buy and hold. When I hear someone talk about dollar cost averaging, I usually assume it is because they don’t know what else to do. Anytime you can get someone to periodically contribute to an investment, you have accomplished something of value.

Table 2.3 is a really simple example of how it works using Apple (AAPL) stock from the year 2011, buying $500 of the stock on the first trading day of each month and determining the results on the day of the last purchase in December. You can see that, on the first trading day of December, you had accumulated 16.65 shares of Apple stock at an average price of $361.70 per share. The lump sum example assumes you bought all $6,000.00 on the first trading day at $329.57 per share, which gave you 18.21 shares.

Table 2.3: Dollar Cost Averaging

From this example, the lump sum investment came out ahead, but I think you can see it has a lot to do with the time period for the investment, the volatility of the share prices, and, actually, the day of the month that you make the purchase. Some of the advantages of DCA are the affordability factor and the convenience; it can be set up just like any monthly household budget item or expense, and also something many people need to keep the process alive. The disadvantages are that lump sum investing can give better returns but also worse returns, and the disadvantage is that you won’t know ahead of time. Also, when making numerous DCA investments, the fees are generally higher than lump sum. The bottom line is that it helps people make investments on a periodic basis, which is always going to be better than sitting on the sidelines because you don’t know what to do. Furthermore, dollar cost averaging becomes less effective as an investor ages because of less time for compounding, and free cash is usually a lower percentage of total investment goals.

Jason Zweig, in a Wall Street Journal article on May 26, 2009, spoke of Benjamin Graham’s comments on dollar cost averaging. Asked if dollar cost averaging could ensure long-term success, Mr. Graham wrote in 1962: “Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions.” For that to be true, however, the dollar cost averaging investor must “be a different sort of person from the rest of us… not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past.” “This,” Mr. Graham concluded, “I greatly doubt.”

He didn’t mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called “firmness of character”—the ability to keep your own emotional counsel. (A102)

Compounding is the Eighth Wonder of the World

I think it was Albert Einstein who made the above comment, even though I found no proof that he did. The rest of the quote is: He who understands it, earns it, and he who doesn’t, pays it. I always remind folks that he forgot to include an adjective. Positive compounding is the eighth wonder of the world, which is usually associated with saving accounts and so on. Table 2.4 is a simple example of how one negative year can ruin your retirement plans. Notice that Investment Option B also started out with a phenomenal first-year return of +36 percent, compared to Option A’s return of only +10 percent. Another example of why chasing performance can be very harmful to your wealth.

The investment option B in Table 2.4 would require a return of 16 percent the following year to get back to the 8 percent per year average. Beware of negative returns; they can destroy your financial plans, especially as you lose time to recover the losses.

It is critical for long-term investment success to not track short-term market movements. Instead, one should only try to outperform the markets over the long term. Let’s assume that your investment goal is to maintain an annualized return of 10 percent over the next five years, as shown in Table 2.5. Here are the hypothetical market returns: +10 percent, +10 percent, +10 percent, -10 percent, +10 percent. Those returns look pretty good at first glance, even though one of them is negative. However, the impact on the actual investment return is quite different. 

Table 2.4 Compounding Example 1

Table 2.5: Compounding Example 2

The important point is that it only takes one drawdown over any one-year period to destroy compounded returns. In the above example, it would take a 33% return in year five to return the portfolio to an annualized 10 percent return. This is why most investors’ performance is far less than that of the actual market. Compounding is indeed the eighth wonder of the world, but it is only when the returns are positive.

Relative Performance

First of all, you cannot retire on relative performance. Relative performance is a marketing concept dreamed up by financial pundits who rarely outperform the market.

Figure 2.5 is a table of various asset classes and their relative performance. Keep in mind that each column (year) is totally independent of the other columns, and the asset classes at the top performed better than those at the bottom of each column. You do not know if they both lost money, both made money or if one made money and one didn’t. It is just simple relative performance. And guess what? You cannot retire on relative returns. Normally, this table is displayed in color, so the delineation between the squares is more apparent, but showing the actual data was not the purpose of introducing it at this point.

Figure 2.5: Callan Periodic Table of Relative Returns. Courtesy of Callan Associates.

Often, the Callan Periodic Table of Returns is shown to convince investors that chasing performance is a bad idea, as last year’s top performer probably won’t be the current year’s top performer. You can see that, sometimes, there is a string of consistent top performance; in fact, in Figure 2.5, Emerging Markets was the top performer from 2003 to 2007. If an investor caught onto that trend after a few years, it wouldn’t have been long before it failed miserably, and sadly, the investor, who probably thought they were genius, had been adding money each year and had no money management concepts or loss protection (stop loss) in place. Emerging markets fell to the worst performer in 2008 and have shown exceptional relative volatility since. If there was any real value in this, it is to learn and understand market history.

This is probably one of the most difficult obstacles to successful investing to overcome. It is human nature to want to be invested in the top-performing stocks, funds, or strategies. Yet you rarely know they are top-performing until after they have had a few good years of top performance. In the old days, many picked up the late January issue of Barron’s magazine, when they showed the performance for all mutual funds for the previous year. Just like the Callan Periodic Table in Figure 2.5 , when something is a top performer for a while, it, more often than not, does not remain so.

Style boxes are another dreadful source of performance chasing. A typical style box, created by Morningstar in 1992, is shown in Figure 2.6. This gives investors an orderly classification system for mutual funds, which is unbelievably popular and used extensively to sell mutual funds. Morningstar ranks mutual funds into a five-star scale, which forces a normal distribution because the top 10 percent get five stars, the bottom 10 percent get one star, the middle 35 percent get three stars, and the other two 22.5 percent groups get four and two stars. Research has shown that investors tend to put money into those with high ratings and withdraw money from those with low ratings, usually when they should be doing the opposite. (A55)

Figure 2.6: Morningstar Style Box

In fact, many fund managers are tied to a particular style and measured by how they performed relative to that style. Their benchmark is the style box they have been classified into. If the fund drifts from its designated style, the marketing pressure ensures adherence to the style box. I like to remind investors that when a manager who is tied to a benchmark (style) outperforms it, they call it alpha; however, when the manager underperforms, the benchmark they like to say is a tracking error.

Later in this book, you will see an investment strategy that does not pay any attention to styles or style boxes; however, I can show you a modified style box for a trend-following strategy in Figure 2.7. A trend follower is only concerned about uptrends and downtrends. If you feel that you must involve a style box approach, I recommend the one in Figure 2.7.

Figure 2.7: Trend Followers Style Box

With all that is arguably wrong with financial theory, the next chapter will delve into some mathematical anomalies with using simple “bell curve” statistics, which are based on assumptions about the market that just do not play well and, in fact, are simply erroneous.

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Think Really Hard About Who You Want On Your Team

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I’m going to start this article a bit different than all the others I’ve written here at StockCharts.com and talk off topic for a paragraph or two.

I grew up in Maryland, quite close to Washington, DC, and was an avid Washington Redskins and Baltimore Orioles fan. I look back now and feel very fortunate that I was able to follow two sports teams that enjoyed decades of success, though both organizations faltered for many years to follow under less-than-desirable ownership. But during the 1960s, 1970s, and 1980s, these two sports organizations won several championships and constantly competed for more. It started with the owners and the culture they built. They hired the right people to build from the ground up and eventually hired two “on-the field generals” that the entire community could embrace. I know I’m a “homer”, but Earl Weaver (Baltimore Orioles Manager from 1968-1982 and also one other year – 1985) and Joe Gibbs (Washington Redskins Head Coach from 1981-1992 and 2004-2007) were two leaders that I immediately respected. I admired Earl Weaver as one of the pioneers of using analytics in his decision-making and he influenced my career as I’ve become quite the stock market historian over the years. Weaver platooned outfielders, depending on pitching matchups, and was one of the first managers to use late inning relief pitchers to seal victories. I’m a “numbers guy” and always have been and I use similar “historical matchups” in the stock market. The use of analytics just makes perfect sense to me.

Joe Gibbs, to this day, is one of my favorite human beings ever. He’s a man of high character, integrity, faith, and family. He is unquestionably a leader, as evidenced by his NFL coaching career, and later, his NASCAR career. He’s simply a winner. His players would run through brick walls for him. He had conviction and he was innovative. Do you know who started the “one-back” set? Counter trey? During his first year as head coach of the Redskins, he started 0-5 before finishing the season on an 8-3 run. The next season, he won his first Super Bowl. He became the only NFL coach in history to win 3 Super Bowls with 3 different starting quarterbacks. Conviction and innovation matter.

These two sports teams and these two coaches, in particular, were of great inspiration to me. They were perfect examples of how to gain an edge on your competition and how you do things the right way.

When I had the opportunity to join the StockCharts.com “team” nearly two decades ago after ending my public accounting career and founding EarningsBeats.com (formerly Invested Central), I jumped at it. Partnering with StockCharts just felt right and we’ve never looked back. While StockCharts.com offers a great trading & tools platform at various price points, they also place a huge emphasis on research and education, two of our three pillars at EarningsBeats.com. I am mostly a self-taught technician as I like to do my own independent research. But I’ve always been a fan of John Murphy’s work and books. Since John was part of the StockCharts team, this was a perfect match for me and EarningsBeats. From its very beginning, StockCharts has boasted a top-notch ChartSchool, providing FREE education, which I use myself from time to time. I’d encourage you to use it, if you haven’t already. There’s a wealth of information and education for both traders and investors. To some degree, EarningsBeats.com has a similar approach. While we charge for much of our market guidance, research, and education, we also provide plenty of FREE information to investors and traders seeking a better and more secure financial future. My Trading Places blog right here at StockCharts is a perfect example, as are my YouTube shows. We also have a FREE EB Digest at EarningsBeats where I produce an educational chart (and two paragraphs) 3x per week. Be sure to subscribe to that with your name and email address if you haven’t already.

In putting YOUR team, that YOU trust, together, I’d encourage you to start with StockCharts.com. I have worked with many of the contributors here at StockCharts and know many of them personally as well. Collectively, it’s a group with high character and integrity with education as a top priority. They provide a TON of free content and you should take advantage of it. Find those that you trust and employ similar strategies to your own, and build the rest of your team from there. In my mind, that’s where a team should start – those who provide education and do their own independent research. That also means IGNORING those that have an agenda, which I’d estimate is roughly 90% of the folks you’ll see on CNBC. We’ve had three (3!!!!!!!!) market crashes in my lifetime, which now spans more than six decades. How can you explain CNBC parading the same group of people across their channel that continue to provide HORRIBLE forecasts year in and year out? There are those that constantly spew a “CRASH” is coming. During my lifetime, the odds of one occurring is about 1 in 20 years. There’s definitely a core cast of “influencers” on CNBC and who knows what their agenda is. I just TURN IT OFF. It is so easy to be swayed when you hear over and over again how awful the economy is. How the debt level is out of control. How higher interest rates will crush the economy. (By the way, now I’m hearing from some folks how the Fed turning dovish is bearish for stocks, too!) You can’t make this stuff up. I’ve “learned” that when the market goes up and breadth is poor, it’s a signal that there’s little participation and we shouldn’t trust the advance. But when breadth is strong, it’s an extreme that marks a top. In other words, SELL if you ever look at breadth, no matter what it shows. Also, if you haven’t heard, a massive recession is coming. That helps to explain why money has been rotating heavily towards consumer discretionary (XLY) vs. consumer staples (XLP) and is currently at a 2023 high – I’m fluent in sarcasm, by the way:

Through all of my years of learning and research, the one chart that I love, perhaps more than any other, is the XLY:XLP ratio. It just makes perfect common sense, right? If our GDP is two-thirds consumer spending and the stock market is the best leading economic indicator, then wouldn’t following a ratio between the offensive consumer discretionary sector (which would presumably do much better in a strong or strengthening economy) and the defensive consumer staples sector just make absolute perfect sense. Look at the correlation coefficient between the S&P 500 and the XLY:XLP ratio in the bottom panel of the chart above. Strong positive correlation is represented by readings > +0.50 and strong inverse correlation is represented by readings < -0.50. This isn’t an opinion of mine. This is an absolute FACT and you can see it clearly on the chart. The XLY:XLP ratio can help us determine if we should expect a current trend in the S&P 500 to continue. It’s my favorite “sustainability” ratio. So when I hear analysts, or anyone for that matter, talk about an impending recession in 2024, I have to disagree. Sorry, not sorry. It helps me ignore all the worries on CNBC and have CONVICTION in my own beliefs.

Conviction matters.

On Monday, December 18th, at 4:30pm ET, I’ll be hosting an event, “The Stock Market & Interest Rates: What History Tells Us.” This is a chance to finish off 2023 by gaining more knowledge about the relationship between the direction of interest rates and the direction of U.S. stock prices. It’ll be one of the many key factors in 2024 stock market performance, so it’s a topic that everyone should understand now. This is a Members-Only event, but a 30-day FREE trial gets you a seat to the event and an opportunity to kick the tires of EarningsBeats.com.

For more information and to start your FREE 30-day trial, CLICK HERE. (Be sure to scroll to the bottom of the form for sign up)

Happy trading!

Tom

Tom Bowley

About the author:
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.

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Why the Santa Rally Stumbled; QQQ Sets Up for Big Move, Be Careful

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Next week could make or break the Santa rally.

The Fed meets on 12/12 and 13, and CPI and PPI are due out simultaneously. As a result, it wouldn’t a bad idea to review portfolios carefully, to consider taking some profits and to game out some potential ways to hedge. Still, the Nasdaq 100 Index (NDX) is forecasting a large, and potentially bullish move soon. Given the bullish seasonal trends, further upside is not out of the question.

This is especially notable given the recent liquidity scare and serendipitous recovery in the financial system, which I describe directly below. Let’s start by looking at the price chart for the Invesco QQQ Trust (QQQ).

Cutting to the chase, the Bollinger Bands are tightening around QQQ’s prices. That’s a sign, as I detailed here, that a big move is coming. Moreover, money flows, as indicated by Accumulation/Distribution (ADI) and On Balance Volume (OBV) are perking up. A move in QQQ above $394 would likely trigger a whole lot of algo trading programs queued up to trade breakouts.

Why the Santa Rally Stumbled Last Week

Stock traders who have profited from the October 2023 bottom should be thanking the bond market for their good fortune, which means that any major reversal in bond yields will likely be followed by what could be a major selloff in stocks. On the other hand, as can only happen in the strange world known as Wall Street, the recent rally in bonds nearly pulled the plug on the entire financial system on December 1.

In fact, the recent hiccup in the Santa Claus rally, from which the market has largely recovered, may have resulted from a reduction in the financial system’s liquidity brought about by, wait for it, the rally in bonds. According to reports, the speed with which the bond rally developed put a squeeze on Wall Street’s money lending machine (the repo market), whose money powder keg was squeezed by the Fed’s QT maneuvers, which led to the huge backup in bond yields.

The whole thing is so bizarre that it took me several reviews of multiple sources to put it together. But here is the simplified version. The Fed’s “higher for longer” mantra and its QT (removal of liquidity from the system), via the sale of treasury bonds, drained Wall Street’s piggy bank for borrowed money, leaving it with less funds than would normally be required further finance the rally in stocks and bonds.

Translation: we had a mini liquidity crisis as Wall Street ran out of money to lend for a couple of days. Stay with me, please. You just can’t make this stuff up.

When the U.S. Treasury Note yield (TNX) was rising to 5% (May to October 2023), spurred by the Fed’s QT and the panicked sellers who joined them in selling bonds, it squeezed the liquidity in the financial system. Thus, even though there was plenty of interest in buying stocks and bonds when sentiment turned, there wasn’t enough reserve money available in Wall Street’s loan machine to lend to hungry traders – the proverbial air pocket.

The visual evidence for the hiccup was the December 1, 2023 bump in the Secured Overnight Trading Rate (SOFR), which is best seen in the Zoom thumbnail to the right of the price chart.

As a result, those who got caught off guard and who ended up playing catchup after they missed the rally in stocks and bonds, which I predicted here way back in October, suddenly found themselves with limited supplies of money to borrow in order to trade the reversal. SOFR is back in sync with the Fed Funds rate now. But yeah, that was an interesting development for sure.

Bond Yields Pause, Mortgages Continue Bullish Decline

So where are we now? SOFR seems to be back in sync with the Fed Funds rate, which is why the stock market has resumed its rally. On the other hand, the U.S. Ten Year Note yield (TNX) has come a long way in a short period of time, which means we can expect it to back up some in the short term.

Indeed, a pause in TNX’s decline could last for the next couple of weeks as the CPI and PPI numbers are released and the Fed meets on December 12-13. Keep an eye on the 4.25-4.4% yield range, as any move above that key zone could trip some algo-selling in stocks and bonds.

Mortgage rates have dropped. A breach below 7% on the average mortgage could well take mortgages to 6.8%, where they will test the 50-day moving average for this series.

Consequently, homebuilder stocks, as in the SPDR S&P Homebuilders ETF (XHB), have broken out to new highs, spurred by the bullish beat of earnings expectations and outlook from Toll Brothers (TOL), which I own and recommended in October, 30% below the 12/2/23 closing price.

The long-term fundamentals of supply and demand remain in favor of the homebuilders and related sectors. For the next move in the homebuilders and other important market sectors, join the smart money at Joe Duarte in the Money Options.com FREE with a two-week trial subscription.

For more on homebuilder stocks and real estate stock analysis, click here.   

Interesting Emerging Sectors

Lately, I’ve focused on value investing, as I did in my recent Your Daily Five video, which you can catch here. As it happens, the trend seems to be expanding into sectors which are well off the radar for many investors. Comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index, you can see the dynamic playing out.

One of the most unlikely areas of the market which has benefited from the value trend is the transport sector, where the difficulties being faced by trucking companies are gathering the headlines, but other subsectors are reaping the rewards.

You can see this in the action for the SPDR S&P Transportation ETF (XTN), which has quietly crossed above its 200-day moving average and which looks poised to make a run at its old highs near the high 80s, barring negative developments.

Market Breadth Recovers Post-Liquidity Squeeze

The NYSE Advance Decline line (NYAD) remains in bullish territory, trading above its 50- and 200-day moving averages. This may be slowed in the short-term, as the RSI indicator is nearing an overbought level. But even with a slower rate of climb than NYAD’s, the market’s breadth is holding up.

The Nasdaq 100 Index (NDX) is inching above 16,000. And with the Bollinger Bands starting to squeeze around prices, it looks as if a big move is just around the corner. Both ADI and OBV are flattening out as profit-taking increases.

The S&P 500 (SPX) remained above 4500 and looks poised to move above 4600. This is not surprising, as many value stocks continue to push SPX higher.

VIX Remains Below 20

The CBOE Volatility Index (VIX) remained below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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