Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Wednesday September 1, 2021. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Major Asset Trends And Market Internals

Now that we are right in the middle of the year, we’ll look at major asset trends and some key market internal statistics to better understand current situations. 

Bonds recovered and all major asset are in up trends

The following table shows the trend scores for major assets (as of 7/30/2021):

Description Symbol 13 Weeks 26 Weeks 52 Weeks Trend Score
Commodities DBC 8.88% 28.37% 50.7% 17.95%
US Equity REITs VNQ 8.04% 26.73% 35.42% 14.85%
US Stocks VTI 4.74% 17.6% 38.95% 12.32%
International Developed Stks VEA 3.12% 11.87% 33.61% 9.75%
US High Yield Bonds JNK 1.59% 3.47% 8.4% 2.64%
Emerging Market Stks VWO -3.03% -0.46% 21.52% 2.22%
Municipal Bonds MUB 1.16% 0.91% 2.58% 0.97%
Total US Bonds BND 2.23% 0.22% -0.88% 0.57%
Intermediate Treasuries IEF 3.47% -0.39% -3.37% 0.36%
Treasury Bills SHV -0.02% -0.03% -0.03% -0.02%
Gold GLD 2.51% -1.62% -8.42% -1.05%

The most interesting parts are that Gold (GLD) is still at the bottom of the table, indicating the lingering worry (expectation) on inflation. In the meantime, bonds (BND) now recovered and back to (slight) positive up trend. Nevertheless, from the following chart, we see both are recovering: 

A word on gold: as always, even though in a longer term, gold seems to correlates well with inflation expectation and US dollar value (inversely), gold in general is too volatile and its price is subject to wild speculation. We no longer advocate gold in one’s allocation portfolio. Or if you really want, limit gold exposure to some small percentage such as on more than 5%. Commodities, though are less volatile compared with gold, are hard to invest as mostly one has to invest in ETFs or ETNs that rely on futures (derivative). As commodities futures market are often volatile and subject to so called backwardation and contango, they again are not well suited to a normal asset allocation portfolio. 

Another interesting observation: on 360° Market Overview, one can see that in the global stocks trend table (not shown here), other than Malaysia and China, all other country stocks have positive trend scores. Though Covid-19 have wreaked havoc global travel, global trades and global economy, financial markets around the globe have been boosted by strong stimulus and monetary policies from country governments. It’s certainly somewhat counter to daily Covid-19 reports, restrictions and even lockdowns. 

We also see that June 28, 2021, Resuming Growth Trends Chaotically? and it continued in the following table: Large growth is still hanging there. 

Description Symbol 1 Week 13 Weeks 52 Weeks Trend Score
Russell Smallcap Value IWN 1.49% -1.49% 62.96% 15.09%
Russell Midcap Value IWS 0.93% 1.06% 46.45% 13.64%
Russell Largecap Growth IWF -1.22% 8.05% 36.37% 12.52%
Russell Midcap Indedx IWR 0.34% 2.75% 42.05% 12.45%
Russell Largecap Index IWB -0.39% 4.82% 37.44% 12.14%
Russell Largecap Value IWD 0.64% 1.54% 38.61% 11.86%
Russell Smallcap Index IWM 0.68% -1.71% 51.34% 10.9%
Russell Midcap Growth IWP -0.51% 6.18% 34.01% 10.41%
Russell Smallcap Growth IWO 0.05% -2.14% 40.64% 7.0%

Again, on 360° Market Overview, from the Sectors trend table, we are seeing Financial, Technology and Industries are the top ranked sectors while traditional defensive sectors like Utilities and Consumer staples are ranked at the bottom. 

Market internals: divergence shows up

As stated previously, we believe that major index trends are good enough to follow. However, market internals or how individual stocks or bonds or subgroups behave are more useful to get a close up sense on the states of markets. In this section, we take a look at some basic metrics to see where stocks are. 

Mid cap and small cap stocks have stagnated

The first way to look at how markets are doing is to look at equal weight indexes. Equal weight indexes eliminate the overweight/underweight effect due to individual stock market capitalization. In the following chart, we look at RSP (Equal Weight S&P 500 stocks, large cap), EWMC (Equal Weight Mid Cap stocks) and EWSC (Equal Weight Small Cap stocks): 

The good news is that the equal weight S&P 500 index ETF RSP is at all time high territory. This indicates that among large stocks, the current all time high market is more widely spread (though, soon, we will see that it’s still uneven). However, both small cap and mid cap equal weight ETFs are stalled. In fact, it looks like they might be even in a mini downtrend since early June. 

Number of stocks in up trends

Now let’s take a look from another key metric: percent of stocks above 200 day moving average. First, the following shows the ratio (percent) of stocks above 200 day moving average for S&P 500 stocks:

Though it declined slightly, it has been more or less at a flat level for some time now. At the moment, 87% of stocks in S&P 500 are above their 200 day moving averages. That’s a good majority. 

Moving on to take a look at stocks in NYSE index (NYSE index represents a wider list of stocks, it can be considered as a mid cap index):

It’s a lot more concerning: the percent of stocks in uptrend has declined since the start of the year. At the moment, it’s at about the same level in February 2020, before the big decline.

Finally, the following chart shows the percent of uptrend stocks in Nasdaq index. It’s not a pretty picture:

This index is clearly declining. At the moment, less than half of stocks in Nasdaq are in up trend and the number seems to continue to decline too. 

In a word, the above data give us some clear warning: the undercurrent for the bullish at time high stock market is deteriorating. Whether this will continue is still yet to be decided. For now, cautions are definitely warranted. 

Market Overview

The earnings report euphoria confirms the above strong trend among S&P 500 companies (though we have no data on mid cap and small cap stocks earnings picture yet): Last week’s S&P 500 blended earnings year over year growth rate was 85.1%, better than 74.2% two weeks ago, better than 69.3% before and 63.3% expected on June 30, 2021 (see Factset). So for S&P 500 large companies, virtually every week, earnings reports made positive surprises. 

On the other hand, the number of Covid cases caused by delta variant virus rose sharply. Based on CDC, the 7-day average of daily US covid cases surpassed peak seen last summer. However, for people who are vaccinated, the severity of the affected is not as serious as what it was and it’s likely the US will not experience another wide spread lockdown. For now, this remains a dark cloud for the economy. 

To summarize, based on what we see in the above, we remain very cautious on the current markets and reiterate the following practice:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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