Although the FIFA Women’s World Cup has captivated many of us recently, generally speaking, there is somewhat of a lull in U.S. sports this time of year. There is, however, one strong cyclical force (if you'll pardon the pun) this time of year that causes at least one segment of the sports world to reach a frenzy in July. With apologies to the golf and tennis enthusiasts in my readership, I am talking about the Tour de France, the world’s most famous cycling event, which kicked off Saturday, July 6th.
For those unfamiliar with the event, the Tour de France is one of cycling’s three Grand Tours. Each July, 22 teams comprised of nearly 200 of the best cyclists in the world, compete in the race, which spans 23 days and covers more than 2,000 miles. With 23 days of televised coverage, you’re likely to catch at least one of the various stages of the race, and if you do, you’ll notice that riders tend to pack together in a group the announcers call the “peloton.” Winners will pull ahead of the peloton, while riders who struggle with the grueling pace or experience equipment issues will lag behind. Like a school of fish, there is a certain "safety in numbers" within the Peloton as riders conserve energy by riding closely together and drafting off one another. A struggling rider or someone who experiences a flat tire might fall behind the peloton with little hope to return to it without help. Meanwhile, those with aspirations of winning a stage or an event, or those with a simple penchant for pain, will have to at some point leave the peloton and expose themselves to all the risks associated with exerting more energy than the pack.
This same principal can be applied to the markets, with the peloton representing the broad market. As this large group winds its way through the investing landscape, many sectors will behave quite similarly and tend to group together. However, there will be sectors that break away from the pack for sustained periods of time, others that fall well behind the pack, and a few that inevitably fall out of the race altogether. Our job as risk managers and tactical investors is to identify the sectors and asset classes that have the strength to pedal beyond the comfortable confines of the peloton and avoid those that lag behind or fall out of the race.
As we have discussed on these pages in the past, we utilize a process through NASDAQ Dorsey Wright called Relative Strength (RS). As the name implies, RS measures the performance of one sector or asset class versus another, like an arm wrestling match. When all the potential matches between the various sectors and asset classes are complete, RS will help us identify those sectors and asset classes that are breaking away from the pack, and also those that are lagging behind. Often times, those that break away will end up being reeled back in due to the general advantages of the peloton. Likewise, those that lag behind may well find the internal fortitude to get back to the group. But, we also know that the cyclists that win each stage of the Tour de France do so by separating themselves from the peloton at some point in the race. Relative Strength does not measure how fast a sector or asset class is pedaling, or the velocity of the rider at any point in time, but rather how much progress the rider is making relative to the peloton. Some markets reward relative strength more than others. The benefits to relative strength models are many, but most importantly they are able to adapt and will continue to search for new leadership.
Relative Strength is just one of the tools that we use to help avoid large losses in our client portfolios. As always, please share this with others who might have an interest.
Until next time, Cheers!