Posts tagged ‘sentiment’

Sector Weightings: Another Financial Toolbox Gizmo


The ever-elusive $64,000 question of “Where does the stock market go from here?” is as popular a question today as it was a century ago. All you have to do is turn on CNBC to find an endless number of analysts, strategists, journalists, economists, and other talking heads guessing on the direction of stock prices. So many people are looking to make a quick buck or get a hot tip, but unfortunately investing is like dieting…it takes hard work and there are no simple solutions. As much as the pundits would like to make this investment game sound like a scientific certainty, in reality there is a lot of subjective art, experience, and luck that goes into successful investment outcomes. Consistent followers of Investing Caffeine understand there are a number of tools I use to guide me on the direction and level of stock prices, and three of my toolbox gizmos include the following:

  • Earnings (Stock prices positively correlated)
  • Interest Rates (Stock prices inversely correlated)
  • Sentiment (Stock prices inversely correlated)

While these and other devices (see SHGR Holy Grail) are great for guesstimating the direction of longer-term stock prices, sector weightings are also great tools for identifying both overheated and unloved segments of the market. Take an extreme example, such as the S&P 500 Technology historical sector weighting in the year 2000. As you can see from the Bespoke Investment charts, the Technology sector went from about a 5% weighting of the overall market in the early 1990s to around 36% at the 2000 peak before dropping back down to 15% after the Tech Bubble burst. If you fast forward to the 2008-2009 Financial Crisis, we saw a similar “bubblicious” phenomenon rupture in the Financial sector. During 1980 the Financial segment accounted for approximately 5% of the total S&P 500 Index market capitalization in 1980 and skyrocketed to a peak of 23% in 2007, thanks in large part to a three decade bull-run in declining interest rates coupled with financial regulators asleep at the oversight switch.

Sector Weightings 1

Source: Bespoke Investment

Source: Bespoke Investment

While some segment weightings are currently above and below historical averages, the chart shows there is a tendency for mean reversion to occur over time. As I’ve written in the past, while I believe the broader market can be objectively be interpreted as reasonably priced in light of record earnings, record low interest rates, and a broader skeptical investing public ( see Markets Soar and Investors Snore), I’m still finding expensive, frothy sub-sectors in areas like money losing biotech and social media companies. The reverse can be said if you examined the 2000 period – the overall stock market was overpriced at its 3/24/00 peak (P/E ratio of about ~31x), but within the S&P 500 stocks there were bargains of a lifetime if you looked outside the Tech sector. Consider many of the unloved “Old Economy” stocks that got left behind in the 1990s. Had you invested in these forgotten stocks at the peak of the 2000 market (March 24, 2000), you would have earned an equal-weighted average return of +430% (and significantly higher than that if you included dividends):

Caterpillar Inc (CAT):                        +416%

Deere & Co (DE):                                  +367%

FedEx Corp (FDX):                             +341%

Ingersoll-Rand Co (IR):                    +260%

Lockheed Martin Corp (LMT):       +811%

Three M Company (MMM):            +254%

Schlumberger Ltd (SLB):                 +158%

Union Pacific Corp (UNP):           +1,114%

Exxon Mobil Corp (XOM):               +148%

                                                  Average +430%

That +430% compares to a much more modest +36% return for the S&P 500 over the same period. What this data underscores are the perils of pure index investing and highlights the room for active investment managers like Sidoxia Capital Management to generate alpha.

There are many ways of analyzing “Where does the stock market go from here?,” but whatever methods you use, the power of examining sector weightings and mean reversion gizmos should be readily accessible in your investment toolbox.

Investment Questions Border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own FDX; non-discretionary positions in DE, LMT, MMM, SLB, XOM, and a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in CAT, IR, UNP, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 8, 2014 at 3:34 pm 1 comment

What’s Going on with This Crazy Market?!

The massive rally of the stock market since March 2009 has been perplexing for many, but the state of confusion has reached new heights as the stock market has surged another +2.0% in May, surpassing the Dow 15,000 index milestone and hovering near all-time record highs. Over the last few weeks, the volume of questions and tone of disbelief emanating from my social circles has become deafening. Here are some of the questions and comments I’ve received lately:

 “Wade, why in the heck is the market up so much?”; “This market makes absolutely no sense!”; “Why should I buy at the peak when I can buy at the bottom?”; “With all this bad news, when is the stock market going to go down?”; “You must be shorting (betting against) this market, right?”

With the stock market up about +14% in 2013, as measured by the S&P 500 index (on top of another +13% increase in 2012), absent bystandershave frustratingly watched stock prices rise about +150% from the 2009 lows. Those investors who appropriately controlled risk in their diversified portfolios and did not panic in 2008-2009, have been handsomely rewarded for their patience. Those individuals who have had their money stuffed under the mattress in savings accounts, money markets, CDs, and low-yielding bonds have continued to watch inflation eat away their wealth. If the investing bystanders make no changes to their portfolios, inflationary and interest risks could outweigh the unlikely potential of Armageddon. Overly nervous investors will have to wait generations for the paltry 0.2% bank rates to equalize the equity market returns earned thus far.

For years I have been listening to the skeptics calling for a purported artificially-inflated stock market to crash. When prices continued to more than double over the last few years, the doubters blamed Ben Bernanke and the Federal Reserve as the instigators. The bears continue to point fingers at the Federal Reserve for spiking the financial punch bowl with unnaturally low interest rates (through Quantitative Easing bond purchases), thereby laying the foundation for a looming, inevitable market crash. So far, the boogeyman is still hiding.

If all the concerns about the Benghazi tragedy, IRS conservative targeting, and Federal Reserve bond “tapering” are warranted, then it begs the question, “How can the Dow Jones and other indexes be setting new all-time highs?” In short, here are a few reasons:

I.) Record Profits:
Source: Calafia Beach Pundit


You hear a lot of noise on TV and read a lot of blathering in newspapers/blogs, but what you don’t hear much about is how corporate profits have about tripled since the year 2000 (see red line in chart above), and how the profit recovery from the recent recession has been the strongest in 55 years (Scott Grannis). The profit collapse during the Great Recession was closely chronicled in nail-biting detail, but a boring profit recovery story sells a lot less media advertising, and therefore gets swept under the rug.

II.) Reasonable Prices (Comparing Apples & Oranges):

Historical PE Ratios

Source: Dr. Ed’s Blog

The Price-Earnings ratio (P/E) is a general barometer of stock price levels, and as you can see from the chart above (Ed Yardeni), current stock price levels are near the historical average of 13.7x – not at frothy levels experienced during the late-1990s and early 2000s.

Comparing Apples & Oranges:

Apples vs Oranges

At the most basic level of analysis, investors are like farmers who choose between apples (stocks) and oranges (bonds). On the investment farm, growers are generally going to pick the fruit that generates the largest harvest and provide the best return. Stocks (apples) have historically offered the best prices and yielded the best harvests over longer periods of time, but unfortunately stocks (apples) also have wild swings in annual production compared to the historically steady crop of bonds (oranges). The disastrous apple crop of 2008-2009 led a massive group of farmers to flood into buying a stable supply of oranges (bonds). Unfortunately the price of growing oranges (i.e., buying bonds) has grown to the highest levels in a generation, with crop yields (interest rates) also at a generational low. Even though I strongly believe apples (stocks) currently offer a better long-term profit potential, I continue to remind every farmer (investor) that their own personal situation is unique, and therefore they should not be overly concentrated in either apples (stocks) or oranges (bonds).

Earnings Yield vs Bond Yields

Source: Dr. Ed’s Blog

Regardless, you can see from the chart above (Dr. Ed’s Blog), the red line (stocks) is yielding substantially more than the blue line (bonds) – around 7% vs. 2%. The key for every investor is to discover an optimal balance of apples (stocks) and oranges (bonds) that meets personal objectives and constraints.

III.) Skepticism (Market Climbs a Wall of Worry):

Stock Fund Flows

Source: Calafia Beach Pundit

Although corporate profits are strong, and equity prices are reasonably priced, investors have been withdrawing hundreds of billions of dollars from equity funds (negative blue lines in chart above – Calafia Beach Pundit). While the panic of 2008-2009 has been extinguished from average investors’ psyches, the Recession in Europe, slowing growth in China, Washington gridlock, and the fresh memories of the U.S. financial crisis have created a palpable, nervous skepticism. Most recently, investors were bombarded with the mantra of “Selling in May, and Going Away” – so far that advice hasn’t worked so well. To buttress my point about this underlying skepticism, one need not look any further than a recent CNBC segment titled, “The Most Confusing Market Ever” (see video below):

CNBC Most Confusing Market Ever?

Source: CNBC


It’s clear that investors remain skittish, but as legendary investor Sir John Templeton so aptly stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” The sentiment pendulum has been swinging in the right direction (see previous Investing Caffeine article), but when money flows sustainably into equities and optimism/euphoria rules the day, then I will become much more fearful.

Being a successful investor or a farmer is a tough job. I’ll stop growing apples when my overly optimistic customers beg for more apples, and yields on oranges also improve. In the meantime, investors need to remember that no matter how confusing the market is, don’t put all your oranges (bonds) or apples (stocks) in one basket (portfolio) because the financial markets do not need to get any crazier than they are already.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 3, 2013 at 10:51 am Leave a comment

Buying Bathing Suits in Winter

Buying fire insurance when your neighbor’s house is on fire or flood insurance as your car floats down your driveway can be a very expensive proposition. Stuffing money under the mattress in money market accounts, savings accounts, CDs, and low-yielding bonds can be a very expensive proposition too, as inflation eats away at the value and the auspice of higher interest rates looms. However, buying things when they are out of favor, like bathing suits in the winter, is an opportunistic way of cashing in on bargains when others are uninterested.

Speaking of uninterested, CNBC recently conducted a survey regarding the attractiveness of stock investing, and according to the participants, there has never been a worst time to invest (as long as the survey has been conducted). Despite consumers planning to spend +22% more on gifts this year, the national mood has not been worse since the financial crisis began in earnest during 2008. Specifically, as it pertains to stocks, 53% of Americans believe it is a bad time to invest in the stock market (SEE VIDEO BELOW).

Vodpod videos no longer available.

If that is not proof enough, check out this cool picture posted by Paul Kedrosky showing a mood hedonometer with the lowest reading since the 2008 market disintegration:


Not a very happy picture. The study filtered through 4,600,000,000 expressions posted by 63 million unique Twitter social media users and graphically displayed people’s happiness (or lack thereof).

Endless Number of Concerns

There is no shortage of concerns, whether one worries about the collapse of Europe, declining home values, or an uncertain employment picture. But is now the time to give up and follow the scared herd? The best time to follow the herd is never. As the old saying goes, “the herd is led to the slaughterhouse.” Investing is game like chess where one has to anticipate and be forward looking multiple moves in advance – not reacting to every shift and move of your competitor.

Certainly, investing in stocks may not be appropriate for those investors needing access to liquid funds over the next year or two. Also, retirees needing steady income may not be in a position to handle the volatility of equities. However, for many millions of investors who are planning for the next 5, 10, or 20+ years, what happens over the next few months or next few years in Italy, Greece, or Spain is likely to be meaningless. As far as our economy goes, the U.S. averages about two recessions a decade, and has done quite well over the long-run despite that fact – thank you very much. Investors need to understand that investing is a marathon, and not a sprint.

December may not be the best time to head the beach in your swim trunks, bikini, or thong, but winter is now upon us and incredible deals abound (see deals for women & men). It may also be windy outside with frigid conditions in the water for stock investors too, but with winter beginning this week, the amount of bargains for long-term investors continue to heat up no matter how chilly the sentiment remains.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in Twitter, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.


December 17, 2011 at 3:06 pm 3 comments

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