Arrow Insights  Subscriber Login
 
Home  
 
|  
  A.I. Indexes  
 
|  
  How To Subscribe  
 
|  
  About Us  
 
|  
  Disclosures
 
 

 InFocus

Archives

Quality Basket vs Broad U.S. Equity Market
June 18

 

Despite rising rates and the highest value in growth-to -value ratio since 2000, the Arrow Insights Quality Value Momentum Index (AIQVM) continues to beat the S&P 500 Index (SPXTR) and S&P 500 Equal Weight Index (SPXEW) in 2018 (Figure 1). AIQVM is up nearly 7% since April 30, 2018.

Astute investors keep their ears to the ground to see if the approaching train has a firm grip of the rails. Bear markets are usually preceded by 9-to 12-month periods of narrow market leadership, wherein most of the S&P 500’s positive return is driven by a narrow segment of the stock market. Year-to-date, the ProShare S&P 500 Ex-Technology ETF (SPXT) is up only 1.7% while the S&P 500 ETF (SPY) is up 4.7%, so SPXT is lagging SPY by 3.04% in 2018 (bottom panel, Figure 1).  

Figure 1–Year-to-Date 2018 Through June 15

This performance occurs while the year-over-year Consumer Price Index is near 2.8% and the Atlanta Federal Reserve’s (Fed’s) GDP forecast is at 4.8%. Inflation is well above the Federal Reserve Bank’s 2% target (middle panel, Figure 2). Economic growth in 2018 is also much stronger than the Fed’s expectations at a time when the unemployment rate is at 3.9%. These factors make it likely that the Fed will hike the Fed Funds Rate three to four more times in 2018.Three or more hikes enhance the odds that the 3-Month U.S. Treasury yield will “invert.” Inversions occur when this yield exceeds the 10-Year US Treasury Yield; the yields are near 1.9% and 2.9% respectively. On a median basis, historically, inversions have occurred eight months before a recession.

SPXTR and SPXEW record the growth of $100 to $312 (a total return of 412%) and $311 (a 411% total return) while AIQVM records $354 (a 454% total return) from May 1, 2003 through June 15, 2018 (Figure 2). They all decline about nine months after the yield inversion begins in 2006.

 

Figure 2–AIQVM, SPXTR, SPXEW & TB3 to UST10Y Ratio–Since May 1, 2003

 

The technology-dominated NASDAQ 100 Index’s (NDX) has surged 13.4% this year. Much of NDX’s surge is driven by Amazon’s 47% climb. The online giant’s shares are worth $836 billion, about a 10% of NDX’s market capitalization. Without Amazon, NDX’s technical strength would be even weaker than is evident with both the bullish percent and the percent of stocks within NDX at 70 and below 70, respectively (bottom panels in Figure 3). Bull markets often die with readings below 70.

 

AIQVM’s allocation to technology stocks is about 14%, while it is close to 24% for the S&P 500 Index. So, it may not be as severely impacted by a pullback in this sector. Next week’s InFocus will cover AIQVM and the S&P 500’s growth stock-to-value stock ratio, which is near the peaks last seen in 1999-2000 (Figure 4). Technology stocks are also leading the S&P 500’s Growth Stock Index.


 

Figure 3The NASDAQ 100 Since 1999 & Current Technical Weakness

 

Figure 4 – AIQVM, Value & Growth–Since Dec 31, 1999 Through June 15, 2018



Inversions and narrow market leadership are onerous at a time when the Fed is hiking rates because these factors are often preludes to a recession. And a recession has always been a prelude to our worst bear markets. 

This report does not provide tailored investment advice. It was prepared without regard for specific circumstances and objectives. The securities shown may not be suitable for all investors. Arrow Insights recommends that investors independently evaluate investments and strategies. The appropriateness of an investment or strategy will depend on investor circumstances and objectives.

The contents are not an offer to buy or sell any security or to participate in any trading strategy. Arrow Insights and its affiliates or its employees not involved may have investments in securities or derivatives of securities of companies mentioned in this report and may trade them in ways different from those discussed in this report.

 

AIQVM: A.I. Quality Value Momentum Index (AIQVM) selects common stocks pursuant to a proprietary selection methodology that is designed to identify Tri-Factor50, the leaders with the strongest fundamental performance characteristics. The index live date is July 31, 2014, with an inception base – date of June 30, 1992. Index data prior to the live date is hypothetical.

HYPOTHETICAL RESULTS ARE BASED ON CRITERIA APPLIED RETROACTIVELY WITH THE BENEFIT OF HINDSIGHT AND KNOWLEDGE OF FACTORS THAT MAY HAVE POSITIVELY AFFECTED ITS PERFORMANCE AND CANNOT ACCOUNT FOR ALL FINANCIAL RISK THAT MAY AFFECT THE ACTUAL PERFORMANCE OF THE FUNDS. NO HYPOTHETICAL PERFORMANCE RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK, INVESTOR BEHAVIOR, OR OTHER MARKET FACTORS – ANY OR ALL OF WHICH CAN IMPACT ACTUAL PERFORMANCE RESULTS. THERE ARE OFTEN VAST DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND ACTUAL PERFORMANCE. NO REPRESENTAION IS BEING MADE THAT ANY COMBINATION OF INVESTMENTS WILL ACHIEVE SIMILAR PERFORMANCE RESULTS TO THOSE ILLUSTRATED.

 

Arrow Insights and its affiliate companies conduct business related to securities covered in its research reports, which may include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, and investment services. Arrow Insights makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.

Reports prepared by Arrow Insights research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals affiliated with Arrow Insights. Chart courtesy of http://www.StockCharts.com

 

Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. 



© 2018 Arrow Insights