Tahoe Market Pulse: Style index rotation key to market success
This year the S&P 500, a measure of large-company stocks, is up about 11 percent. As good as that sounds, the S&P 600, a measure of small-company stocks, is up 25 percent. Small-cap stocks performed better than large-cap stocks. That isn’t always the case. Two years ago large-caps more than doubled the small-cap performance.
Looking more closely at this year’s results, the S&P Small-Cap Value Index is up about 30 percent while S&P Small-Cap Growth is up 20 percent. Value investing performed better than growth investing.
Instead of buying-and-holding one market segment, it is best to employ a strategy that allows the investor to rotate to the best-performing area. When large-cap stocks are leading, then hold an S&P 500 index fund.
Once small-cap or mid-cap stocks lead, however, switch to a mid-cap or small-cap Exchange-Trade Funds (ETFs). Rotating to the leading market segments is what my style index rotation model is all about. I’ve published this mechanical model in my two ETF trading books, both of which are available at the Washoe County Library.
How do you know what segments are leading? Each weekend I post relative strength rankings for style index ETFs, sector ETFs, and Fidelity Select mutual funds free-of-charge on the Analysis page of http://www.ETFtradingstrategies.com.
The ranking uses ETFs from the iShares family because they cover all the style index choices, ranging from large-cap growth to small-cap value. I trade client money through Schwab so I often use Schwab ETFs because they trade commission free.
Trading style index ETFs allows investors to gain well-diversified exposure to a specific area of the market and gives investors the flexibility to quickly move from value stocks to growth stocks, or from small-cap stocks to large-cap stocks.
By owning the better performing ETFs (top half of the relative strength ranking) an investor can outperform.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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