Sector Rotation Proves Transition to Bullish Conditions: Market Commentary from Cabana’s CEO – November 23, 2020

2 months ago

  • Share this:

The past week has seen continued rotation into cyclical assets like industrials, materials, consumer discretionary, financials, and even beaten down energy. We have been watching for this since August when we first pointed out the divergence between big tech and everything else. We pointed out then that we would eventually need to see other sectors get a little bit of the love that has been shown to big tech (FAANG) since the COVID-19 pandemic began in late February.

During our monthly webinar with our partner advisors last week, we spent quite a bit of time talking about what we have seen since the beginning of the month and, particularly since the election. We covered quite a bit of ground and discussed how helpful it is to watch the equal weight S&P 500 index (RSP) versus the more commonly known market cap weighted S&P 500 index (SPY). The market cap weighted version skews the underlying health of the market toward a few huge tech companies. As such, the average market watcher would think that all is rosy on the earnings front as the media focuses on only the market cap weighted index. The same is true of the DOW and Nasdaq. In reality, all the other components (companies) that make up these indices have been struggling and are underwater for the year. For more information on this, please refer to our commentary from two weeks ago (here).  

As far as earnings go, we are still very much in a bear market when we look at the majority of companies in the aggregate. With that said, things are improving. How do I know this? It’s simple. I just watch for the equal weight S&P 500 to begin to outperform the market cap weighted S&P 500. It typically takes the lead when we are entering or are in a cyclical bull market for stocks. Its leadership tells us that there is market breadth across all industries, and it is not just one horse running the race. I have included a chart that shows RSP overtaking SPY for the first time since the bear market began in February. This is a chart we presented during the webinar last week and is worth taking a look at again as the trend is continuing today.

Finally, you will see a second chart below curtesy of StockCharts.com, which compares the performance of the various sectors within the S&P 500 over the past few weeks. This shows us that we are finally seeing some participation by the other horses in the race. It doesn’t mean that Apple, Amazon, Facebook and Google are finished, but it does mean that investors believe we have an end in sight to the very strange world we have been living in the past eight months. The potential medical solution to COVID cannot be overstated.

Download a PDF of this commentary at the following link:

Disclaimers

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.

"The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana's future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.

The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. Visit www.fa-mag.com for more information regarding the ranking.

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

The COVID-19 health epidemic has had substantial global economic impact on financial markets. As of March of 2020, restrictions to travel and business spanning the economy for activities not deemed essential have been imposed throughout the United States. These restrictions have caused unprecedented volatility and uncertainty in capital markets and have negatively impacted the economy. It is unknown how severe the impact to the economy and capital markets will be if the epidemic persists for an extended period of time. The epidemic may have a material adverse impact on Cabana’s investment advisory business including, but not limited to, the performance of our portfolio strategies.

For additional information regarding our services, including performance disclosures, please visit https://thecabanagroup.com/disclaimers/.