Sometimes great minds think alike in the investment team, and I see that this blog overlaps the excellent piece on recent market performance that Carl posted on Friday. Nevertheless, here are a few additional thoughts on the topic.
The S&P 500 Index finished trading last Friday at a closing price of 1225. This is the same price the Index closed on 11/05/10, and it is +1.6% ahead of the close on 4/23/10, a period of close to eight months where stock investors have been disappointed. As I like to say, owning the broad market for the past eight months has been like “kissing your sister.” There just hasn’t been any thrill to being an equity investor when measured from the April market top. However, as Carl said last Friday, looking at the broad large-cap U.S. equity market doesn’t tell the whole story. For example, small-cap U.S. and mid-cap U.S. have both broken out to new highs as measured from the April peak (see chart on Carl’s blog). If you drill down into the S&P sectors and industries you find a number of fairly significant winners measured both from the April top and the November 5th top for the S&P 500 Index. Here are just a few sectors and industries that have performed well since April 23rd top and since 11/05/10. (Note: Pinnacle owns positions in all of these securities in various managed strategies.)
Gain Since 4/23/10
IGV Software ETF +13% XOP Oil and Gas Exploration ETF +11% IGN Networking ETF +7.1% XLE Energy ETF +7%XLY Consumer Discretionary ETF +5.6%
SPY S&P 500 Index ETF +1.6%
Lately we’ve been discussing the best strategy for buying this particular market. Should we view it suspiciously as the broad market has yet to convincingly break through important resistance that goes all the way back to late April? Or, should we be concentrating on individual sectors and industries that have already convincingly broken out to new highs and not worry about the broad market? Clearly tech, energy, and consumer stocks have resumed the bull market that began in March of 2009. In the past our investment process has focused on the broad market first. Presumably you could make the argument that waiting for the broad market to break out of its trading range is the more conservative methodology for risk averse investors. However, it may be that we have to switch gears here and begin to allow ourselves to invest more from the “bottom up,” meaning that we concentrate a little more on the sectors and industries. In a flat market like this, where gains might be fleeting, we may have to let the underlying sector performance guide our thinking more than it has in the past.
