The previous blog post discussed all the latest political developments and economic data that have been affecting the market.
Keeping up with such news is an important part of market strategy. However it is also important to analyze what is going on beneath the surface of the market, with regard to sectors, industry groups and individual stocks.
As discussed in the section above entitled “Investment Philosophy,” we believe that market strategy should involve analyzing three major areas:
- global macro news (political and economic developments)
- earnings and other fundamental data on stocks
- a technical overlay, or a review of market activity from a technical analysis perspective
By having the software and procedures in place to review all three of these topics on a regular basis, we can put together the whole mosaic of economic and market activity, and draw investment conclusions. A weekly review from the week ending 2-14-20 shows that there were some noteworthy developments in sector rotation during the week.
After underperforming for the past few months, the real estate sector has just broken out to a new high, as seen in the chart below.
Figure 1 Real Estate ETF (XLRE)
The utilities sector made a similar breakout in mid-January and have been outperforming the overall market since then.
In the financial sector, the insurance stocks have been acting well.
Due to these and other market developments, we are making some changes to our model portfolio which was outlined in the blog post entitled “Current Stock Picks 1–28–20.”
We are removing one stock, namely Huntington Ingalls (HII), which plunged below its 50-day moving average on very high volume (a sell signal) as a result of a disappointing earnings report.
We are replacing it with Applied Materials (AMAT), in the semiconductor equipment group, as well as making some additional changes to the portfolio which will be shown in the next blog post.
Note on performance: The portfolio of 23 stocks discussed on 1-28-20 has outperformed the S&P 500 over the past three weeks, with a gain of 4.8% compared to 4.4% for the index. Two stocks had poor performance due to weak earnings reports (HII and MDT) but these were offset by very strong performance from other stocks in the list, such as Charles River Labs (CRL), Activision Blizzard (ATVI), Adobe (ADBE) and Synopsys (SNPS).
Note: this calculation was done assuming an equal weight for each of the stocks in the list. Over the last few days we have done a more detailed analysis of sector and industry group weights, and we are specifying the weights of the stocks in the model portfolio in more detail.
Please see the next blog post, which will contain a more detailed discussion of this portfolio.