Acknowledge Your Denominator

January 12, 2023

A question that keeps coming up to me is why Consumer Staples and Low Volatility stocks are outperforming.

These are normally the types of things you see when stocks in general are under pressure.

This is the kind of rotation you get in bear markets.

But the back half of 2022 was good for stocks. The 4th quarter was great.

Most stocks have been ripping for almost 7 months now. This is NOT the type of environment where Staples and Low Volatility stocks tend to outperform.

And while they might be making new multi-year highs relative to the S&P500, it's pretty easy to outperform an index with so much exposure to growth stocks. So can we even call that 'outperformance'?

Historically Industrials have the highest positive correlation with the overall market of all the S&P Sectors.

So if we replace the growth-heavy S&P500 with a more well-rounded denominator like Industrials, then you can see how that "relative strength" in Consumer Staples and Low Volatility disappears.

Are these the types of charts you want to buy?

Or are these the ones you want to sell and avoid altogether?

I think it's important to consider your denominator.

Is picking the wrong asset to compare to clouding your judgement? Are you getting bad information because you chose the wrong denominator?

I don't know what's going to happen next. I don't have all the answers.

But I do like to really think things through, as you guys know.

And if Consumer Staples and Low Volatility stocks are outperforming, then I would normally chalk that up as an overall negative for the stock market.

But if "the stock market" is being defined as a very specific index that has way too much exposure to U.S. growth socks, are we really getting the information there that we're looking for?

I don't think we are.

So we adjust for that.

And the result is what you see in the chart above, which is the opposite of outperformance. You see relative weakness, which is perfectly in line with what we're seeing in the rest of stocks across the U.S. and around the world - a bid.

How about you? Are you acknowledging your denominators?

Premium Members make sure to get caught up on our LIVE Monthly Charts Strategy Session where we go over all of the most important sectors we want to own, and the best stocks and ETFs to take advantage of the current environment.

This is one you cannot miss.

We're off the a great start to 2023.

The first 5 days of the year were positive, and this was after Santa showed up for his annual rally.

We're making money from the long side.

And the most important part is that these uptrends are not anything new. Most have been in place already for almost 7 months.

These are 'ongoing' uptrends, not new ones.

Check out the full video and download the slides here.

And if you don't have access for whatever reason, just shoot me an email and we'll fix that right away.

Also feel free to give me a call: +1 (323) 421-7910

See you in there!

- JC