2021 has been a very unusual year for the US stock market. The benchmark S&P 500 (SPX) index has been up by as much as 26.3% for the year at its November 22nd highs — and has risen by an unbelievable 116.4% from the March 2020 Covid 19 lows.
This year has been characterized by a very strong “buy the dip” mentality in the S&P 500: that is, whenever the index declines to its 50-day moving average, you just buy it. And, thus far, this strategy has been extremely successful. The 50-day moving average in the S&P 500 has been tested 10 times this year, including the one that just took place in early December, and eight of them have triggered the resumption of the larger bullish trend. In fact, the biggest decline from any minor peak that SPX has had all year has been 5.2%. On the surface, that seems like a pretty calm market and a pretty easy year to invest.
But, below the surface, 92% of the S&P 500’s constituent stocks have had at least a 10% decline, and the average decline has been 19%. This means, like a duck on the water, the part that we can see looks calm and sedate while there is frantic churning going on below the surface. The market has also been very thin in terms of participation and has been characterized by a lack of leadership. Of the typical market leaders, Small Cap stocks have been underperforming the S&P 500 since March, the broad NASDAQ Composite (COMP) has been a relative performer since July, and the Large Cap NASDAQ 100 (NDX) and Semiconductors have only been steady outperformers since November. A handful of Mega Cap stocks, the likes of Microsoft (MSFT), Alphabet (GOOG), and Nvidia (NVDA), have really been responsible for the stability that we have seen in the broad market.
This type of environment is particularly difficult for sector rotation as, because the money is jumping from place to place so quickly, it is very difficult to enter a trend early enough to capture any outperformance. Especially amid these conditions, we are particularly pleased with how our SEAF Model has performed this year.
The SEAF Model (SEAF)
The flow of money is one of the only metrics we know of that actually leads price movement. The SEAF Model “follows the money” to determine where investor assets are going, and where they are coming from, in US stock market sectors. This model tracks the total net assets invested in 11 Sector ETFs, in 3 different time frames, to determine the best opportunities to capture outright and relative performance in the sector space. This model is updated weekly, over the weekend when the markets are closed, through the closing date shown on the table.
How To Read & Interpret The SEAF Model
- The leftmost column, Sector (Symbol), lists the 11 sectors of the S&P 500 as represented by the Select Sector SPDR ETFs.
- The next column, As Of (Date), indicates what percentage of the total assets invested in all 11 sectors each individual sector comprises through the closing date shown.
- The next three columns show the percentage of the total assets invested in each of these sectors one week ago (the Trading time frame), one month ago (the Tactical time frame), and three months ago (the Strategic time frame.)
- Then, for the two sectors with the biggest percentage increase in inflows (green highlights) and biggest percentage outflows (red highlights) in each of the three time periods, we replace the percentage value with the actual date that trend of “being in the top two” began to provide some historical context to those sectors showing a significant trend of inflows or outflows.
The next two tables below display performance data for the SEAF Model through November 2021. The starting date is May 2020 because we had to allow for the data from the Communication Services Select Sector SPDR Fund (XLC, the newest addition to the Select Sector SPDR ETFs) to normalize to the rest of the data. Each performance category is compared to the benchmark S&P 500 (SPX). The more significant comparisons are highlighted in green.
The first table below displays the quarter-by-quarter relative performance of the SEAF Model vs. the S&P 500, showing that SEAF has outperformed the S&P 500 in 5 of six quarters (83%) tested.
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The next table below compares quantitative performance vs. the S&P 500, showing that the SEAF Model:
- Has a significantly higher total return (see chart below) and annualized total return
- with just a slightly higher drawdown and risk.
- Has a significantly higher alpha (excess return) and a lower beta (systematic risk).
- Has both a significantly higher up capture ratio (gains in up markets) and significantly lower down capture ratio (losses in down markets).
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The chart below plots the daily performance of the SEAF Model vs. the S&P 500, in terms of percentage return, since May 2020.
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Disclaimer: This is provided for information purposes only and is not intended to be a solicitation to buy or sell securities. The performance indicated from back-testing or historical track record may not be typical of future performance. No inferences may be made and no guarantees of profitability are being stated by Asbury Research LLC. The risk of loss trading in financial assets can be substantial. Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition.