As a former analyst, now portfolio manager, being a data geek goes hand-in-hand with assessing various market, sector and individual security risks.
Often, if the data cant be found in one place, a spreadsheet is created to track various data sources, just to see where the data leads.
A look at the spreadsheet using the Bespoke/Schwab data, it shows the majority of sectors within the SP 500 are “overbought” if you measure risk by the % of stocks trading above their respective 50-day moving averages. (Long SCHW for clients)
What caught my attention though, was the current market cap weightings by sector. A client asked recently where the risk was in the market – not an easy question to answer – but if you look at the period from 2000 t0 2008, one tip-off to the bear markets was the growing weight of the troubled sectors within the SP 500.
Technology as a percentage of the SP 500 grew to 33% of the market cap of the index at the peak in March, 2000. Fully 1/3rd of the benchmark was Tech, with many not surviving the Tech recession of 2001 and 2002. Technology, as a sector, grew earnings and revenues routinely between 30% – 40% in the late 1990’s, only to see that crumble in 2001 and 2002, when Technology earnings growth fell 60% for two years.
Financials suffered the same fate in 2007, with the sector approaching 30% of the benchmark during the mid 2000’s thanks to leverage and asset growth. (Todd Harrison, the founder of Minyanville, and a former trader with Jim Cramer’s hedge fund, Cramer & Berkowitz, made this point many times in his newsletter in the middle of the last decade, in terms of the growing weight of Financials as percentage of the SP 500, being a major red flag. )
If you look at the data in the spreadsheet, what struck me was the weights of the sectors are within reasonable ranges, but so are the sector earnings growth rates. Technology and Financials, the two troubled problem children of the last decade, are now 35% of the SP 500 combined, in 2014, versus their individual weights in the last 14 years.
Within the SP 500 today, (actually the SPY), of the top 10 holdings within the key benchmark, which comprise about 18% of the benchmark, Technology has just 2 names in the top 10, with a weighting of 5.5%, while the Financial sector has 2 names with a weighting of 2.5%. (It depends on how you treat GE, though).
The point of this blog update tonight is that, sector weightings can be a major red flag for the market risk.
In reality today, we have a very “democratic” stock market, with normal growth rates within the sectors and normal sector weightings.
The SP 500 could see a 10% – 15% correction anytime, but I don’t think we will see a period of prolonged negative returns like we was from March, 2000 through March, 2009, given the above data.
No one seems to think we could have a long period of just long, boring, stock market returns.
Again, that is just an opinion. We’ll keep updating the spreadsheet and putting it out for readers every few months, just to see what we see.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA