Today’s column is designed to give you a little better understanding of what is going on inside the black box of your investments. Hopefully it will be enlightening. If you are a DIY investor, this principle is quite important for you to know or study.
On television Mr. Market seems to be a monolithic organism. You are told that the Dow 30 Industrials Index did such and such or the S&P 500 index gained or lost so many points. However as I emphasize, there is always a dramatic difference between individual parts of the whole.
For example, since the closing April 30 high point of 2,945.83, the S&P 500 has dropped to about 2,826 through Friday, May 24. This is a loss of about 4.1 percent. However, the best performer of the 500 through last Friday is Coty, the cosmetic company, with a gain of 20 percent. It has gone through a reorganization recently, and insiders are apparently buying more shares of it.
On the other end of the spectrum, Kohl’s (KSS) lost 28 percent of its value in the same time period. It appears that roughly 259 company stocks have outperformed the index. This comparison is only taking into account the change in share price.
Since most companies’ stock price movement most closely matches up with that of its industry group, you can take advantage of the strength of an industry or stock relative to the movement of the broader market indices. REIT’s (real estate investment trusts) in the form of Healthcare Facilities rose by 6.8 percent during this new downtrend since April 30 to May 24. That is the best performing group of companies.
Health-care companies have been beaten up fairly badly in past months while REIT’s have been rising even in the past three weeks, clearly bucking the general market trend. Perhaps a countertrend in health-care companies is teaming up with the real estate uptrend. This kind of difference in a few weeks’ time – positive 6.8 percent compared with negative 4.07 percent for the S&P 500 – is worth some attention for the intermediate to shorter term trend follower.
Cash can also provide a positive relative strength factor in a portfolio at times. Most of the folks I know hate to have cash or money market funds in their portfolios, even for a short period. But our recent client results have been generally better than the S&P 500 because we have sold some positions in the past few weeks and we are waiting to replace them until better investing “weather.” Short-term bonds or even the Aggregate Bond Index (AGG) can play the same role. The latter is higher by 0.76 percent in our measured period.
Our best indicators show clear weakness in stocks right now. The culprit is fairly obviously the potential that the trade fight with China may boil over into a larger scale tit-for-tat kind of downward spiral. We hope we are wrong but we are taking some protective measures and will be prepared to adjust either way.
(Statistics are derived from Worden Brothers, Inc., TC2000 software, 2019.)
(Past performance is no guarantee of future results. Advice is general in nature and not intended for specific situations.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at email@example.com.