October confounded the bears who were beginning to growl quite loudly. Indeed, instead of getting tricks and a deeper correction that took the S&P 500 towards 4000 or lower, investors who stepped up on our tactical buy signal were rewarded with treats. With the FOMC announcing its much anticipated “tapering”, many are asking — Where do we go from here and how do I position for market beating returns? I will discuss these important questions in this month’s FSI sector allocation update.

Before I do, let me remind readers what the goals are:

• Outpace the S&P 500 by actively managing the 11 S&P 500 Sector SPDRs, but also taking on less risk.
• We are not looking to be super aggressive tactical traders trying to pick every tiny wiggle in relative sector performance.
• With this being said, we normally have a 6-9 month view, at minimum, try to keep turnover on the lower side, and to beat the S&P 500 by having high Sharpe and Information ratios (i.e., risk adjusted returns).

We have written previously in our regular updates about the market climbing the Wall of Worry. Well, the wall is still present, and the bears are still telling us how high and unnavigable it its. They talk about the newly present inflation pressures, rising interest rates, elevated energy prices, tighter monetary policy from the Fed, and a corporate profits backdrop that is ready to fall off a cliff.

Yes, this is a potentially worrisome mix of factors, and we are watching them all closely for their potential to negatively affect the U.S. equity markets. So, when we continue to hold our longstanding constructive view on the S&P 500, we do not do so without deep analysis into how and when these potential landmines will impact investors. In fact, we continue to acknowledge that the current mix of negatives could contribute to the end of the current bull market, but our work strongly suggests time is not now. Importantly, our proprietary indicator-based investment process, which has a large profit cycle analysis component, remains favorable and is still portending higher highs for the S&P 500.

In our last note, we were just entering the 3Q21 earnings season and there was a lot of worry about how supply chain problems and input cost pressures were going to severely hit Corporate America. No doubt it was not easy to produce solid results, nor was it not without some casualties, but once again U.S companies have been resilient and able to navigate the challenging operating environment as the current results have been quite impressive, especially considering what these companies have been up against. Based on our analysis, this is a very important support that has kept and should continue providing tailwinds for the equity market to keep moving higher. Stay the course for now.

In conclusion, we at FSI continue to hold the view that active management of portfolios can beat passive strategies over time if one employs a disciplined and data-driven approach to investing. Our research suggests that this is no easy task, but it is clearly obtainable. However, it does take self-discipline and perseverance.

Sector Overview

Our new updated sector recommendations are shown below.