Tag Archives: S&P500

Portfolio Weighting: Equal weighting, part 1. S+P500 considerations.

3 Jul

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I do not automatically assume that everyone knows or understands that the S&P500, and indeed its sectors, are capitalization weighted rather than being equally weighted.  Although, being color blind, I am not totally enamored of the current fad on “maps” of market sectors, this is one of those times when a graphical representation is the best way of briefly explaining, or showing, how the capitalization weighting employed in the S&P500 (and many other popular indices for that matter) works to skew the influence of one stock over another in the index or the sector.  This map of the S&P500 and is from the good folks at finviz.com:  (click on any graphic to view full size).

So, for example, Apple (AAPL) makes up a much larger part of the S&P500 than does Dell (DELL) and so changes in its price will have a larger influence on the index.  This is what you are buying when you buy the S&P500 ETF SPY, or one of its many clones.

But what if you changed how these stocks are weighted but still included all the stocks in the S&P500?  How about if every stock in the S&P500 were to be weighted equally?  That’s non-discrimination for you, but apart from that, what impact would it have on returns?  We’ll take a look at that in a bit, but you should know that Rydex has such an equally-weighted S&P500 product, ticker RSP where all the stocks in the S&P500 are equally weighted.  Please note that the stocks are equally weighted but the sectors are not.  RSP follows the S&P 500 equal-weight index (and actually with little tracking error) which S&P describes thusly:

The S&P 500 Equal Weight Index (S&P 500 EWI) is the equal-weight version of the widely regarded S&P 500. The index has the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight.

If you want equally weighted sectors not stocks, and don’t want to do it yourself using the sector SPDRs, ALPS has an ETF of ETFs that will do it for you, their ALPS Equal Sector Weight ETF.  On their website ALPS says:

The ALPS Equal Sector Weight ETF (Ticker Symbol: EQL) is an ETF of ETFs that delivers exposure to the US Large Cap Equity market by investing equal proportions in each of the 9 Select Sector SPDRs.

The only problem with EQL is its very low volume, which frankly is a turn-off.  SPY counts its daily volume in millions and RSP well into the hundreds of thousands so no worries there.

As to performance, equal weighting of stocks pays off.  Over a year,we can see that RSP has a material uplift over SPY.  An extra 6% a year isn’t to be sneezed at.

Shown graphically in TC2000 chart we can see how closely EQL actually sticks to SPY but RSP’s overperformance is plain to see:

For the year to date things are a bit closer but RSP still has the lead, and it’s enough to make a difference:

But how about in the recent/current correction? EQL edges out a lead here but in practical terms it looks as if RSP does better for us in down markets than the standard equity weighted SPY, and again by enough to make a difference.

Over a two and five year period, the comparison graphs look like this (EQL excluded from the 5-year as it hasn’t been around that long):

CONCLUSION: From the 5-year chart we can see that RSP doesn’t always outperform SPY, but based on recent experience, and the fact that over five years RSP roughly doubles the performance of the S&P500 while still investing in the same portfolio group, it looks as if it would be hard to exclude it from consideration in portfolio design.

PLEASE NOTE:  PALADIN MONEY REVIEWS ARE FOR EXPERIMENTATION, EDUCATION, ILLUSTRATION AND DISCUSSION ONLY.  THEY ARE NOT SOLICITATIONS TO PURCHASE SECURITIES OR INVESTMENT RECOMMENDATIONS

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Is our IBD portfolio pointing market direction?

28 Jun

I think we’d all like to know which way the market is headed with certainty, but we don’t.  My outlook tends to be bullish but I am also very defensive of profits.  In this current correction I had been down to cash and gold in all three of my portfolios, but have taken some limited long positions this week — and they’ve worked out (so far).

Indicators:  The top-10 IBD50 portfolio we track here turned from down to up on June 17th, and has since climbed, not without pause though, to a value of $62,850, which compares pretty well to its pre-correction high of $65,537 on April 25th.  This portfolio is due for a content review this weekend, but it certainly marked a turning point.  Of interest is that also on June 17th, VectorVest’s market timing indicator also turned and has been steadily heading North since.

It may be that market moves are more broadly spread than the major indices that the major media focuses on.  If we look at the Wilshire 500 we see what looks like not only a turning point but an uptrend:

BULLISH: Here we see support at March’s low, a nice little uptrend starting, refusal to pierce the 200-day SMA and a bullish MACD cross.  BEARISH: The upside volume is hardly strong which may indicate a lack of conviction, and, adds to the likelihood of rapid and large market moves.

The S&P500 chart shows a base but no uptrend, so maybe the larger stocks aren’t participating as fully as smaller stocks:

Again we see support at the mid-March low and right at the 200-day SMA.  BUT, at risk of stating the obvious, a close above 1,300 is needed to really start the warm and fuzzies AND the upside volume is really on the light side.  If this little mini-rally fails the question is then posed as to whether we are seeing a rounded top in the S&P500 that will lead inexorably to the downside.

CONCLUSION: Since June 17th there has been money to be made in the market.  I do not allow that the market has turned though, QE2 ending, the general poor economic news and reductions of estimates still predominate, and oh, it’s still Summer.  So, lots of protection required, I will be carefully checking foreign markets, futures, etc every morning before the market opens.  All holdings loaded into Smartstops too.

RANDOM thoughts:  I am very happy with my sugar (ETF:SGG) purchase which has made me 12.2% since the 9th of the month.  I have chart scans in TC2000 to thank for showing me that uptrend.  And speaking of TC2000 scans, the Chinese Internet stocks are looking interesting if risky but I have gone long BIDU and SINA.  Now, how about GOOG? Has it gone too low?

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Did today’s market action confirm to the downside?

23 May

We have certainly been in a period of increased volatility and uncertainty, but I think today’s market action now makes it more likely than not that the overall markets will continue their decline for the time being.    If I am correct there is an intermediate area of support to be penetrated first, but, if that support does not hold, then I believe there is a very good chance that the market can fall to the lows of March 16th this year.  If the market does pull back to that point, we’ll see what happens after that.

This timing is perfect for the final installment in our three-part series as we will be looking at systematized exits, and of course, stops.  I spent Sunday night looking over and adjusting my stops, with an eye to protecting profits where they have accumulated, and really cutting losses off.  Several stops fired in my largest portfolio this morning, which is now 57.46% in cash, and I should tell you that of the remaining long positions, a quarter is in gold (IAU) .  Unless I see some serious reversals to the upside in the morning I am going to liquidate my “real” IBD50 portfolio and also my Gorilla Trades portfolio.  I see a much greater probability to the downside than the upside in those portfolios.

This might also be a good time to remind you that you can still get 10% on top off any other discounted prices at SmartStops by using the discount code PROTECTME5.  You might find their blog instructive too.

Let’s look at some indices, charts courtesy of TC2000.  Starting with the Wilshire 5000 (which isn’t 5000 at all, but that’s a story for later).  The notable thing about this broad-market index is that it  not only carved its way through its 50-day SMA but it also closed outside its channel of support.  As a complete aside, but indicative of how the market has still not recovered from 2007-8, the W5000′s high in 2007 was 15,807.

The Dow Jones Industrial Average closed roughly at its 50-day SMA, having been lower during the day.  If the downtrend continues, possible support around 12,200 otherwise the mid-March low of around 11,600.

The NASDAQ composite opened and closed below its 50-day SMA.  there is intermediate support at around 2,720, the Fib 61.8% retracement, otherwise again I see the mid-March low as the likely target.  The Russell 2000 also gapped down at the open and closed down below its 50-day SMA

Last the S&P500, which opened above its 50-day SMA but closed a good way below it.  Intermediate support at around 1,302 but the 1,260 region is the ultimate fall-back for now.  In the two portfolios that I hold SPY, the S&P500 ETF, I am sitting on decent profits.  The stops are set to protect the bulk of that profit but I am mulling harvesting the profit and sitting on the cash for a while before the stops hit.

In addition to penetrating their 50-day SMAs, all the indices discussed had one other thing in common.  The negative volume, while substantial, did not exceed the 50-day moving average.    We”ll see soon enough if that means something or nothing.  I’m not there yet but I am starting to look at some inverse ETFs for inclusion.

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