A Barbell Strategy of Stay-at-Home and Reopening Stocks
In a prior 4/07/20 Blog entitled - It is All Relative – 2 S&P 500 sectors dominated the top 100 SCTR list. Half of the top 100 ranked large-cap names were 30 Healthcare stocks and 20 Technology stocks. A deeper dive in the list also showed 5 of the top 10 SCTR scores were Technology names and 2 were Healthcare names.
Back in April 2020, it was reasonable to expect investors to focus on the Healthcare sector and specifically on the Biotechnology industry due to the Covid-19 pandemic. During this period of market uncertainties, many investors also felt comfortable with defensive-minded sectors. Another explanation for the active interest in the Healthcare group is the favorable long-term demographics trend (i.e., aging population).
It was compelling why investors turned to many Technology names during the sheltered in place environment. However, we also suspect many investors continue to believe this sector is a structural growth industry and can also benefit from the wireless 5G technology revolution. Many investors turn to this sector because many Technology stocks can grow faster than the economy. Second, Technology is also one of the largest market-cap-weighted sectors within the S&P 500 Index (SPX) and is over 40% of the NASDAQ NDX 100 Index (NDX). Due to the sizeable market-cap weighting in the Technology sector, professional money managers needed to be in many of the blue-chip Technology names.
On 7/1/20, a screening of the top 100 large-cap names ranked by SCTR showed Technology and Healthcare stocks dominating the list. There were 26 Technology stocks and 22 Healthcare stocks occupying the list. Investors also began to favor economically sensitive sectors as 11 Consumer Discretionary stocks another 9 Industrials showed up on the top 100 list. Below the surface, improving relative strengths from cyclical sensitive industries hint at economic recovery and hence the continuation of the SPX bull rally. What is most interesting it appears the marketplace was more balanced than any other period this year as 7 Technology, 5 Healthcare, 4 Consumer Discretionary, and 4 Telecommunication Services stocks occupied the top 20 list.
As we fast forward today (11/23/20), the promising results on the vaccine front give investors further hope for a sustained economic recovery. Investors continue to rotate into the reopening stocks and away from the stay-at-home plays. A current review of the top 100 large-cap list ranked by SCTR scores further confirms investors are indeed moving into the reopening stocks in anticipation of an impending vaccine-driven rally. A deeper dive in the top 100 SCTR list shows economically sensitive sectors now dominating the list. For instance, the largest concentration of stocks comes from Consumer Discretionary (26 names), Industrials (21), Technology (16), and Financials (9).
Less than six months ago, it felt like everyone was buying FAANGs and technology-based stay-at-home stories. Growth stocks outperformed value stocks by the greatest amount in decades in what appears to be the biggest dichotomy since the dot-com era of 1999-2000.
So, the pertinent question then becomes, is the current rotation into the reopening stocks sustainable and longer-lasting? And is the stay-at-home technology-driven rally over?
While some are expecting that everything will return to normal tomorrow, the COVID-19 pandemic has forever changed the way we live, work, spend, and invest. Pandemic has accelerated some of the technology trends that would have happened anyway. It has also created widely overbought levels in many of these growth-related names. The long-term stay-at-home rally of 2020 is probably far from over. The secular growth story strongly suggests investors still need to be positioned in the Technology sector, longer-term. Despite the underperformance over the past few months, 16 technology names remain in the top 100 list as ranked by SCTR scores. Nonetheless, the recent epic rally from the Mar 2020 bottom has created an extended technical condition. It is reasonable to expect further consolidations before the resumption of the primary long-term uptrends in many of these secular growth names.
In the meantime, a barbell strategy of investing in stay-at-home stocks and economically recovery stocks can be a worthwhile investment strategy for today's market environment. For your review is an updated list of the top 100 large-cap stocks ranked by SCTR and by the different sectors.
Remember, SCTR is a relative ranking system that incorporates six (6) technical indicators covering three different time frames (long-term, medium, and short-term) with 200-day ma, 125-day rate of change, 50-day ma, 20-day rate of change, 14-day RSI, and Percentage Price Oscillator. The technical ranking system uses a numerical score from 0.0 to 99.9 to rank each security within the market, sector, and industry. Stocks with SCTR ranking over 90 tend to be the strongest in the group, and stocks below 10 are often the weakest. In general, an SCTR score between 40 and 60 is considered average. Signs of technical weakness begins as SCTR scores start to decline below 40. Signs of technical strength emerge when SCTR scores move above 60.
The SCTR score considers multiple timeframes and puts more weight on the long-term technical indicators over the short-term indicators. The overall SCTR score consists of 60% weighting on the two long-term technical indicators (200-day ma and 125-day rate of change). The two medium-term indicators (50-day ma and a 20-day rate of change) account for 30% of the overall SCTR score, and the two short-term technical indicators (14-day RSI and 3-day slope of PPO) are the remaining 10% of the total SCTR score.
Investing is always about relative performance against a benchmark index. SCTR score is a performance measure that compares one stock to other stocks within a specified sector, group, or market. Since it is a relative measure, it does not convey how the group or sector is performing against each other. For example, if the group has performed poorly, and one stock stayed at the same level of performance, then the stock's SCTR rank may rise relative to the other names within the specified group. Also, remember, just because a stock's SCTR rank rises do not imply that it is performing well. Instead, it suggests it is not performing as poorly as the other names within its universe.
When accompanied by other technical disciplines, it can be a way for an investor to identify technical leadership names that may outperform their peers across different timeframes. On the downside, it can also be a useful tool to uncover underperforming securities within a sector, group, or market.