ERM Shows Healing Process Continuing; Keep the Barbell
The negative sentiment and disbelief about the current stock market rally remain pervasive. With this as a backdrop, we ran our monthly update of our single stock quantitative selection model (ERM) this past week, and the bullish conclusions coming from our deep dive were quite interesting.
Our latest review shows that the healing process, which began in late-March, continues strongly and impressively. The number of stocks in our ERM model that have shifted to favorable has increased nearly every week and is still rising.
I cannot overstate how supportive this is for equities. In other major earnings revisions bottoming periods, post-Tech Wreck in March ’03 and post the Great Financial Crisis in March ‘09, my work looked very similar to the current period. In these periods, when earnings revision hit their lows, powerful rallies followed.
When looking at the broad-based S&P 1500 Index on cap size basis, Large Caps (S&P 500) revisions are still the best followed by Midcaps (S&P 400) and finally Small caps (S&P 600). I believe that structure will stay in place until COVID-19 starts moving into the rearview mirror. But once this does happen, I expect a major shift in relative performance on many levels.There are currently two main areas of favorable...