For most of this year so far, the market has lacked the breadth and broad participation usually behind a strong market trend (in either direction). In January, we had a brief moment where Small Cap stocks were doing great, but that hasn’t gone anywhere since then. What has driven the market higher this year has been a small, select group of larger company stocks. These stocks also make up the majority of the indexes. Comparing an equal-weighted blend of the S&P 5001 against the S&P 500 capitalization-weighted average shows this divergence over the past few months: the largest stocks/big names seem to be performing better. However, that gap appears to be lessening.
The Federal Reserve’s announcement this week was almost non-existent to the stock market. Not even as much of a hint of a change, for now. So, the market seemed to have just ignored the Fed. As always, we know bigger issues are looming, like inflation, but until the broader population starts to notice, I’m sure we’ll have business as usual.
As of Thursday night, our Shadowridge Dashboard is showing Positive to Negative sectors as 9 to 2, which has been getting stronger into the end of the week. What has me a bit baffled is that earlier this week, and some of last week, we had negative signals on our Long-Term data, which lasted only a day or two. But now it is back to positive. All that being said, the overnight market action isn’t looking great for Friday due to Amazon earnings missing expectations. If the Long-Term trend can stay positive, we’ll likely lean a bit more into equity holdings. Pullbacks have been a good place to add money into the stock market, so we’re looking at that as an option while the trend lasts.
This month’s chart – High Volatility vs. Low Volatility. There are two ETFs that each own a portion of the S&P500, but broken into two parts: High Volatility (or Beta) and Low Volatility (or Beta). Generally speaking, if High Volatility stocks are stronger than Low Volatility stocks, we should have a steady and strong market. Conversely, if Low Volatility stocks are stronger than High Volatility stocks, the market tends to be more volatile and unsure. The chart below shows the ratio of the two. If the line is rising, then High Volatility is showing strength, and if the line is falling, then caution may be worth considering. Red boxes are around the areas where low beta was stronger, and the S&P 500 below was more volatile. From the looks of the crossover in early July, we could be in for higher volatility in the not too distant future.
Bonds – the Aggregate Bond Index can’t seem to get positive this year. As of this writing, the Aggregate Bond Index AGG is at -0.70%. High Yield bonds remain strong, being up around 2.85% through July of 2021 (FastTrack Data). The bond market as a whole remains a sketchy place, especially when it’s a place where investors normally park assets for less risk. But there still are few bright spots to be found.
The overall balance of risk to reward, to us, remains questionable. We could make a case for the market to continue upwards just as easily as we could make a case for a downward turn. As long as this environment persists, we plan to keep portfolio risk as managed and moderated as we possibly can.
Don’t forget to catch our monthly webinar version of this newsletter, where I dive deeper into what I mention in the newsletter commentary. For me, nothing tells the story as much as visuals, so that is how I prefer to dig into what we’re doing with investment decisions. After me, Will and Laura will be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, August 12th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.