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Recent Technical Trends

Recent Technical Trends

| July 16, 2018

In an effort to ramp my blog back up to speed, I want to discuss two recent themes, or market trends, courtesy of one of our primary providers – Dorsey Wright.

1. Small Caps Resurgence While International Equities Cool-Off

And just like that, July has begun. The month of May is behind us, as is June, and so too is the talk of “Sell in May and go away.”  However, does that mean we are completely out of the woods?  We are still firmly entrenched in what is known as the seasonally weak six month period in the market, so it remains important to pay close attention.  The S&P 500 managed a gain of 2.16% in the month of May to put the S&P 500 up 2.74% over the first five months of the year.  Underneath the surface, though, there were two notable themes: Small Caps showed a resilient resurgence and International Equities cooled off. 

The month of May saw most of the major Small Cap indices push to new all-times highs (like the Russell 2000 and S&P 600 Small Cap Index), and performance across the broad-based Small Cap ETFs ranged between 6.2% for the iShares Russell 2000 ETF (IWM) and 8.4% for the Invesco DWA Small Cap Momentum ETF (DWAS).  The strength in Small Caps during the month also lead to the Small Cap Growth Style box moving up to the top of the Size and Style rankings of Dynamic Asset Level Investing (DALI).  Small Cap Growth has been among the leaders all year long as the style box has been in the top three of the nine style boxes; however, now it has moved up to lead the pack.

DALI Size and Style Rankings:

Coming off a strong year of 2017, global equity markets have faced more headwinds so far in 2018.  The SPDR MSCI ACWI ex-US ETF (CWI) fell more than 2% in the month of May causing the performance of this International Equity benchmark to fall into negative territory on the year.  The strength in the US Dollar (DX/Y) has certainly contributed to this near term weakness in the International Equities markets.  The US Dollar spent the better part of 2017 falling in a negative trend; however, since falling to a recent low of 88.50 in February of this year, the Dollar has rallied more than 7% off its lows to a recent high of 95.00.  All of this being said, International Equities continues to hold onto the number two position within the broad asset class ranks of DALI behind US Equities.  The recent weakness in International has caused the gap between US and International to widen a bit, but as it stands today International Equities continues to enjoy a notable lead over the number three ranked asset class - Commodities.

2. Technology – Moving to New Highs

While the broad U.S. Equity market has yet to surpass its January 2018 highs, Technology has continued its market leadership and moved to a new high earlier this month.  A look at the relative strength chart of Technology compared to the S&P 500 below shows a series of higher highs and higher lows going back nearly four years.

Jamie Powell of the Financial Times also recently weighed in on this trend and pointed out that it is not just in the U.S. that we are seeing Technology lead.  He pointed out that over the past five years, we  have heard some prognosticators posit that we are in the midst of another tech bubble. Crystal ball surrogates like Forbes, Motley Fool, CNBC and his own Financial Times have at some point thrown the popular market-top term around, only to see the technology leviathans shoot higher on the promise of unbridled earnings growth.

So, are the valuations of technology darlings another example of frothy investor sentiment getting ahead of fundamentals? Well, not according to Goldman Sachs, who despite warning of a “valuation air-pocket” in US technology last June, released on Monday a note titled “Why tech is not a bubble”.

We all know that tech stocks in both Asia and the US have been on tear since the market bottom in 2009:

(For clarity, “FAAMG” is Facebook, Amazon, Apple, Microsoft and Google while the strangely aggressive “STTAB” acronym consists of Asian counterparts Samsung, Tencent, Taiwan Semiconductor, Alibaba and Baidu.)

Trend following strategies and specifically relative strength strategies tend to perform well when we find multi-year trends to invest in.  Right now, as the charts above indicate, Technology continues to be one of the strongest trends and it shows no signs of letting up at this point.

As you can see, the markets are dynamic and leadership in those markets changes.  The information at our disposal from multiple sources helps us stay abreast of these changes.  We thank you for the confidence and trust you have in us. 

As always, please call with any questions or comments.  And please feel free to share this information with others

Until next time, cheers!