Please CLICK HERE to download the April sector allocation report in PDF format.
Market recap
Happy April FS Insight family and hope you had a great Easter Sunday.
S&P 500 rose another 3.2% in March, but the rise was not primarily driven by the YTD leader the FANG+ or Magnificent 7. Instead, the further gains in March stemmed from other sectors, aka ‘Breadth Expansion’ – 7 out of 12 sectors (we listed FANG+ as a separate sector when analyzing sector performances) outperformed the S&P 500, compared to only 5 in February and 4 in January.
Speaking about sector performance, commodity sectors such as Energy and Materials led the market with increases of 7.3% and 3.1% respectively in March. The bond proxy sector, Utilities, also saw a rise of 3.2%. Additionally, with Fed Chair Powell’s ‘more dovish than expected’ stance and alleviating concerns about higher-than-expected CPI in January and February, cyclical sectors like Financials and Industrials outperformed the market by 1.6% and 1.2%, respectively. Real estate was the biggest laggard, down -2.0% relative to S&P 500 in March, while Tech excluding FANG+, also trailed the market by -1.9%.
Market breadth improvement is also evident in cap-weight vs equal-weight performance. After trailing the cap-weighted index in January and February, the equal-weight S&P 500 topped the cap-weighted S&P 500 by 1.1%. Both mid-cap and small-cap outperformed the S&P 500, while mega-cap lagged for the first time this year.
In the growth vs. value debate, large-cap values rallied strongly relative to growth after two months of underperformance. Particularly, Large-cap Pure Value outperformed Large-cap Pure Growth by 3.2%.
Within other major factors we track, Low Volatility was the only one trailing the market, which is expected as markets have been on the bull mode and Low Vol stocks tend to underperform in such risk-on environments. Momentum, although the outperformance has slowed, remains the best performing factor year-to-date, beat the S&P 500 by over 1200 basis points.
Sector Allocation
In April’s sector allocation, while Thomas Lee’s sector ratings remain unchanged, Mark Newton downgraded Healthcare from Overweight to Neutral.
- On his note on 3/26, Mark noted that Healthcare was not able to follow through its recent bounce since November 2023, underperforming on both cap-weighted and equal-weighted bases.
- Mark expects further relative weakness in Healthcare over the next month.
- However, he also mentioned that June and July historically tend to be positive for the healthcare sector. Hence, he will likely revisit Healthcare in May.
Besides Healthcare, Mark also commented on the leading sectors: Energy, Utilities, and Basic Materials in his recent daily reports..
- Energy (OW by Mark Newton): Energy has been one of Mark’s top sector picks for 2024. Last week, Mark noted the incredible rally of Energy over the past month has gone unnoticed by many investors. Currently, Energy is at an important juncture, with the 50-DMA of WTI crude oil being less than 1% below the 200DMA and a “Golden Cross” is very close to materialize. Historically, a “Golden Cross” has had bullish implications. Mark expects further gains for Energy leading up to May, followed by a possible consolidation.
- Utilities (UW by Mark Newton): Mark pointed out that the recent run in the Utilities sector has helped the sector break a lengthy intermediate-term downtrend. Although it has not yet shown a breakout from a relative perspective, it is getting very close. Overall, Mark is monitoring the Utilities sector closely for evidence of a relative breakout this month.
- Basic Materials (Neutral by Mark Newton): Benefiting from the macro environment, the Materials sector has broken its previous high from the end of 2021 in the past month. Mark noted that this breakout to new highs is likely to result in strong performance in the following period.
Tactical Sector Momentum
Aside from minor adjustments in sector ratings, our Tactical Sector Momentum Measurement
has also seen some small changes.
- The top three sectors with the best short-term trend remain Financials, Communication Services, and Industrials. Their high ranking in the tactical momentum has led to a respective weight increase of +2%.
- The three sectors that were tactically underweight last month, Discretionary, Utilities, and Energy, have shown improved momentum recently. Thus, the -2% weight reduction from last month has been reinstated.
- In this month’s update, Materials, Consumer Staples, and Technology have fallen to the last three positions. We will temporarily reduce their weight by -2%.
- You might question how Materials dropped to the bottom three. In fact, Materials have performed well in short-term price indicators such as P/20D and 20D/200D. However, its lower ratings in DQM and IBD EPS have cause the drop in Tactical Sector Momentum Measurement.
In summary, compared to last month’s allocation:
- Due to changes in tactical momentum, we have decreased the weights for Materials, Consumer Staples, and Technology. With Mark’s downgrade of Healthcare to Neutral, we have slightly reduced the Healthcare weight by 0.4%.
- Due to the improved tactical momentum for Discretionary, Energy, and Utilities, we added back their previously reduced weights for this month.
- The increase in weights for Industrials, Communication Services, and Financials is mainly due to their strong performance over the past month.
Regarding the overall S&P 500 index:
- Our largest overweight positions remain in Financials, Industrials, and Communication Service, with additional weights of +2.6%, +2.5%, and +2.0%, respectively.
- We recommend a slight increase in weight for Energy, Healthcare, and Consumer Discretionary, at +0.4%, +0.2%, and +0.2%, respectively.
- As for Technology, due to its lower ranking in the Tactical Sector Momentum mentioned above, we have temporarily reduced its overweight position from an additional 1% to an underweight of -1.1%. We may add weight to Technology back if its momentum improves.
- We continue to recommend a reduced position in Utilities (-0.7%), Materials (-2.0%), and Consumer Staples (-4.3%), with a market weight for Real Estate.
* The above-mentioned weights are based on an 85% Sector ETF + 15% Tactical ETF allocation. If you are 100% allocated to Sector ETFs, you can refer to slide 43 in the attached Deck.
Tactical ETF Picks
In March, our tactical ETF picks outperformed the S&P 500 by an average of 0.2%.
- 4 of our 5 tactical ETF picks outperformed the S&P 500 in March. The best-performing ETFs were ITB -0.67% and PAVE 0.60% , beating the S&P 500 by 4.2% and 2.4% respectively.
- The biggest performance drag was IHAK 0.55% , which declined by 3.5% in March (-6.6% relative to the S&P 500), dragging down the overall performance.
In April, after discussions with Mark, we decided to remove IHAK 0.55% and IHI 0.09% and instead add ARKW 0.15% and BITB -2.12% , as both demonstrated strong technical strength and are timely buys.
- The new 5 tactical ETF picks are ARKW 0.15% , BITB -2.12% , ITB -0.67% , PAVE 0.60% , and SOXX 1.44%
By the way, Mark will host his Live Technical Analysis webinar this Thursday at 2 PM. You can register and submit or upvote the ticker(s) you’d like Mark to cover HERE. Don’t miss it!
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.
