[Charts of The Week] Finding Alpha In Flat Markets

JC Parets
May 31, 2019

From the desk of Tom Bruni @BruniCharting

Wall Street is a game of relative performance and we each are tasked with our own mandates/constraints in managing our portfolios.

The good news is that even when the market is a hot mess on an absolute basis, there are still plenty of ways to find performance within the context of those constraints.

If you need to have most of your capital allocated most of the time, then your focus is on either avoiding/shorting areas of relative weakness and owning areas of relative strength.

If you have the flexibility to raise cash and go to the beach or have short exposure on your books, that works too.

Regardless of your approach, there are macro trends that we should all be aware of as market participants. I hinted at some of them earlier this month when I wrote about "The Trends We Indirectly Follow", but today I want to share three charts from our Monthly Institutional Factor Report that highlight factor-related trends we need to be mindful of.

The first is a trend we've been talking to our clients about for months, relative weakness in US Value Factor relative to the broader, Large-Cap S&P 500 Index. Since breaking below support in November, the downtrend in this ratio has accelerated and fallen nearly 10% over the last 6.5 months.

Click on chart to enlarge view.

It's not just a US phenomenon either (it rarely is), we're seeing it in internationally as well. The Value Factor in Developed Markets has fallen off a cliff after breaking its September lows in March. Again a 4% relative decline at the index level may not seem all that significant (it is), but what if you were allocating to Value stocks at the individual component level? You may have exposed yourself to more risk than you bargained for.

Given those two charts are very extended to the downside, I thought I'd leave you with a trend that's still in the early/middle phases of development in our opinion. That is the Quality Factor relative to the broader market, which broke the downtrend line from its 2016 highs in February and has been consolidating toward the top of its year-long base since then.

This is a classic trend reversal and we expect to see some acceleration to the upside soon, as this consolidation has allowed momentum to work off its bearish divergence and the 200-day to flatten out and begin rising.

The message is clear, Quality is back.

The bottom line is that by being proactive in monitoring these macro trends we can save ourselves a lot of headaches and increase our chances of achieving the performance we're paid to deliver.

And who wouldn't want that?

We go through this process for all the major Factors and the rest of our universe regularly, issuing Monthly Reports that outline any major developments in these relationships for our Institutional Clients. If that sounds interesting to you, visit our website or email Jonathan Bloom directly at jbloom@allstarcharts.com for more info.

Thanks for reading and let us know if you have any questions! 

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Allstarcharts Team

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