FSI Sector Allocation - March 2024 Update

Please CLICK HERE to download the March sector allocation report in PDF format.

Market recap
Happy March FS Insight family! In February, the market maintained its strong momentum since the end of October last year. The S&P 500 rose by 5.2% in February, bringing the year-to-date (YTD) performance to 6.8%. Historically, after a strong first two months, the stock market tends to maintain this robust momentum.

We have listed below 21 years since 1950 where the stock market rose by more than 5% in the first two months:

• As you can see, in 19 out of those 21 instances, the equity markets turned higher from March to the end of the year, with an average increase of about 13%.
• The only two exceptions were in 1987 (Black Monday) and in 2011 (US Sovereign debt credit rating downgrades).
• We will provide more seasonality analysis in our regular macro or technical notes.

Turning to sectors, in February, cyclical sectors led the stock market rally, especially FANG+, which outperformed all other sectors. Other cyclical sectors also performed well, either beating the overall market performance or improving relative to January.

The only exception was the Communication Services sector, which was the worst performer if excluding the FANG+ components, META, NFLX, and GOOGL.

All Near-cyclical and Defensive sectors trailed the market, particularly the more defensive Staples and Utilities. This reflects the market’s preference for risk-on over the past month.

This risk preference is also reflected in style performance. Relatively lower-risk styles such as Low Volatility and High Dividend lagged behind the relatively higher-risk Style High Beta.

Regarding other factors:

• The Momentum factor still worked very well in February, outperforming the S&P 500 by 6.3% and outperformed YTD by an astonishing 10.9%.
• Growth outperformed value again, with an even greater outperformance when comparing Pure Growth vs. Pure Value.
• Megacap continued to lead within size factors, but some improvement was observed in Mid and Small-cap.

Sector Allocation
In March’s sector allocation, Tom and Mark made no adjustments to their strategic sector ratings. Below are the results after this month’s model update.

Here are the current strategic sector ratings for Tom and Mark:

• Again, the current ratings are consistent with last month. Our previous investment thesis remains intact.
• As you can see, Tom and Mark’s views are mostly aligned across most ratings.
• The only differences are in Discretionary (OW by Tom but Neutral by Mark) and Real Estate (OW by Tom but UW by Mark), mainly due to Tom’s investment thesis primarily based on fundamental and macro considerations, while Mark relies primarily on technical analysis.

The major change this month comes from adjustments in the tactical sector momentum.
The OW sectors based on tactical momentum are:

• Financial
• Communication Services
• Industrials
• Financial and Communication Services were in the top 3last month.
• The advance for Industrials is mainly due to its recent strong performance and high rank in the DQM.
• Unfortunately, Healthcare dropped off the top 3, mainly due to a shift to a more neutral stance in both the DQM and IBD models.

The UW sectors based on momentum are:

• Discretionary
• Energy
• Utilities
• Discretionary slipped to the bottom 3 in this month’s update, mainly due to a decline in rankings across all three DQM, IBD EPS, and IBD Technical models.

Taking into account all the changes in the model, in the latest sector allocation results, compared to the benchmark S&P 500:

• our largest OW comes from Financial and Industrials by an extra weight of 2.2% and 2.1%, respectively.
• Following closely are two FANG-related sectors, Communication Services and Technology, overweight by 1.7% and 0.8%, respectively.
• Moreover, despite demotion from the tactical metrics, Healthcare is still favored by both Tom and Mark, thus we remain OW by 0.5%.

In terms of underweight sector, due to low rank in the momentum metrics, Energy and Discretionary were underweighted by 1.6% and 1.8%, respectively.
Based on strategic ratings, Staples and Utilities were underweighted by 2.3% and 1.7%, respectively.
We keep other sectors (Basic Materials and Real Estate) at market weight.

* The mentioned weights are based on an 85% Sector ETF + 15% Tactical ETF selection. If you allocate 100% to Sector ETFs, you can refer to slide 43 in the attached Deck.

Tactical ETF Picks
Since the February sector allocation release, our tactical ETF picks have, on average, outperformed the S&P 500 by 1.6%.

• Thanks to NVDA and AMD, SOXX rose the most, gaining 10.7%, and outperforming the S&P 500 by 6.8%.
• The infrastructure ETF PAVE 0.18%  and Homebuilders ETF ITB 0.18%  also outperformed the S&P 500 by 3.3% and 1.7%, respectively.
• The Cybersecurity ETF IHAK -0.58% , influenced by PANW 0.61% , gave up its relative gain from earlier February, underperforming the S&P 500 by 0.5%.
• The biggest performance dragger was IHI -0.04% , which, although it rose by 0.5% in absolute terms, did not keep up with the overall market’s rise, underperforming by 3.4%.

In March, we decided to keep these five Tactical ETFs unchanged. Unfortunately, due to Mark still recovering and gradually returning from his recent medical emergency, we have not included the usual technical comments from Mark in this report. We appreciate your understanding.

We hope you will find the Sector Allocation Strategy useful in your investment journey. The strategy will be updated on a monthly basis, and we look forward to hearing your thoughts on how we can make it better. If you have any questions about this, or any other aspect of our work, please do not hesitate to e-mail us at inquiry@fsinsight.com.