4th Quarter Market Update

Brent Carlson |

Ahh… October! The best time of year! What a month to be a sports fan, any sport’s fan. Baseball, Football, Basketball, Hockey, and many more. October has all the bases covered, from sports to hunting, to all the outdoor activities that can be appreciated this time of year. Of course, the most notable of sporting events to fall in the month of October is the World Series.  The playoffs are already underway, and as the games unfold over the next few weeks, it will ultimately be the team that wins the most games that will be named the 2017 champ. This concept of outperformance (or winning) leading to a top rank (champion), is intuitive to all of us, sports fan or not. After all, there is a reason people are more likely to put money on teams with winning records versus losing records. Past leadership is often a positive indication of future outperformance, and that is not only true of competitive sports. In fact, this is the same logic we strive to apply within our portfolios through Relative Strength investing.

Relative Strength is nothing more than a means of ranking securities based on comparative performance.  Said another way, we can compare the daily price movement of two or more securities and identify the securities that are “winning” or outperforming others. We then aim to invest in the areas of the market with the highest Relative Strength rankings. Like markets, sports teams also rotate in and out of favor. Look no further than the Twins, after missing the playoffs 7 years in a row, they became the first team to lose 100 games in a season and come backto make the playoffs the following year. So too can asset classes, sectors, and even individual stocks. The beauty of the Relative Strength process, is that as areas of the market begin to underperform, they will fall lower in the rankings, and true laggards will be sold out of the portfolio. In short, the process helps us adapt to ever-changing markets. 

Moving forward into the last quarter of 2017, we know the following “stats” to be true of the market:

  • Volatility remains at historic lows, and US stocks continue to move to new highs.
  • Domestic Equities remain the top ranked asset class, although after notable improvement this year, International Equities come in at a close second. The other major asset classes (Fixed Income, Cash, Commodities, and Currencies) all sit well below the equity groups as they have for much of the year.    
  • Within US Equities, we find sectors like Technology, Financials, Industrials and Basic Materials atop the leaderboard, each offering additional upside potential.
  • While Large Cap stocks (names like Apple, Microsoft, Facebook, and Amazon) have been responsible for a big portion of the major market index gains so far this year, Small and Mid Cap stocks have picked up momentum over the last several weeks.
  • Interest Rates have rebounded off of their lows from September, but remain well below highs set early in the year.  This relative instability has pointed toward opportunity in “non-traditional” areas of the bond market. Convertibles and International Bonds are the current leaders in this space.
  • Additionally, our dividend-paying water utility stocks have been particularly strong lately.


International Equities

Although U.S. Equities continues its reign as the top ranked asset class, International Equities has narrowed the leadership gap and now trails by just 25 signals as of this writing. Europe Emerging sits at the top of the country-emphasis rankings in Dynamic Asset Level Investing (DALI), followed by Asia-Pacific Developed. We have already increased international exposure in many client accounts through Emerging and Developed Market ETF’s as well as individual stocks. Stay tuned and we will continue to be proactive in developing a game plan to increase your International exposure.

US Equities: Sector Strength

From a U.S. sector perspective, Technology, Financials, and Industrials hold the top spots on a relative strength basis, though Financials lost some ground during the month of September. Meanwhile, the Energy sector, which lagged considerably over the first and second quarters, rebounded to some degree in the third quarter. Energy remains at the bottom of our sector rankings but we will continue to keep an eye on the sector's progress during the fourth quarter.


As always, we will continue to monitor your portfolios, and recommend any necessary changes as leadership changes within the market.  If you would like to become more familiar with my investment process and the tools I use to identify market leadership across major asset classes and within asset classes, please contact me at your convenience.


The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

The article and any opinions expressed therein are those of Carlson Asset Management and do not necessarily represent the opinions or strategies of Dorsey, Wright & Associates, LLC