Tag Archives: chart

A Pioneering Approach To Earnings Season

Summary US Q2 earnings season was one of the most volatile ever. We present Pioneering Quantitative Approach focusing on prices and not on fundamental data. Our analysis provides a guide per sector and per capitalization. ABSTRACT “Qui sait le passé peut conjecturer l’avenir”, Jacques-Bénigne Bossuet As we are just about to enter in the Q3 Earnings Season in the US, Uncia AM decided to provide you some keys to understand the Q2 Earnings Season. Bloomb erg already gave some keys: US stocks got biggest earnings bang since 2012 . This empirical study emphasizes many things: 1/ It is not worthwhile to keep equity position over the earnings: earnings releases are a lottery. As difficult as it may be for our equity analyst friends to admit (note: the author is an asset manager) , all available empirical data shows that it is impossible to predict market reaction following an earnings release. We thus need to distinguish the fundamental component of the reaction which is less unpredictable (related to turnover, EBITDA and other hard data) from the “price signal” component. The latter has always been impossible to predict, even if we take into account the released fundamental data. From a statistical perspective, the specific movement linked an the earnings release is on average null, as can be seen from the highly leptokurtic distribution of the movement. For an asset manager seeking to optimize their Sharpe Ratio, it is therefore not worth maintaining a position in the equity over the release period (assuming transaction & liquidity fees to be marginal) (click to enlarge) Source: Bloomberg, Uncia AM, Alphametry. Read the entire article in order to make your own opinion : 2/ Information Technology sector behaved properly during this session, on almost all indices. 3/ The specific Russell 2000 – related stocks moved a lot on earnings: maybe more interest of investors for UScentric names, as a consequence of fear over the USD strength and the world/Chinese macro slowdown. As the article may be a bit technical, here is a brief takeaway: On average, stocks from Nasdaq Composite Index (NASDAQ: CCMP ) exhibit a null return over earnings, but with large volatility. Therefore, it justifies the strategy to cut positions over earnings. In addition to that, we can notice that signals were slightly better on large caps vs small caps, and quite good in a sector such as Information Technology. “Weekly speaking”, we experienced a sharp positive signal on CCMP, but on a “PEAD” perspective only few comonotony between Earnings Moves and Drift Returns. On average, stocks from Russell 2000 Index (RTY) exhibit a null return over earnings, but with large volatility. Therefore, it justifies the strategy to cut positions over earnings. In addition to that, we can notice that signals were slightly better on large caps vs small caps, and quite good on a sector such as Information Technology, same things as we notice on CCMP. There are a lot more “PEAD” signals on RTY than on CCMP, meaning that as there are many companies belonging to both indices, many companies belonging only to RTY exhibit large signals. This means that investor attention was largely focused on UScentric companies. “Weekly speaking”, since the beginning of the year, we had very positive signals on RTY, but the summer was very complicated as we can see a downside candle at the beginning of August. Stocks from S&P 500 (SPX) are less volatile over earnings than those of CCMP, RTY or Nasdaq 100 (NDX). It may be explained by the average size of capitalization, but this is not sufficient as NDX average capitalization is higher (58.0 vs 50.2) is higher than SPX. We make the same notification about earnings release volatility that is not rewarded, unless capitalization criteria is not worthwhile anymore, nor sector criteria (even if we can see a positive skew for Information Technology sector). In terms of “Weekly signals”, we can notice numerous negative signals, emphasizing an overreaction of investors about bad news versus good news. We have only few data, but first of all, we can notice that stocks from Nasdaq 100 (NDX) exhibits the largest average capitalization, and the largest absolute earnings moves. For more technical readers, should you be interested in the underlying philosophy, please go ahead: METHODOLOGY Our sample takes into account earnings that occurred between 2015, June 30th and 2015, August 31st. We only focus on companies whose market capitalization exceeds $1 billion, the day before the earnings release (ER)/call (NYSE: EC ). We focus on 4 main US indices: Nasdaq Composite , Nasdaq 100 (NDX), S&P 500 (SPX) and Russell 2000 (RTY). Our method to estimate the move due to earnings release/call is the following: We assume that the Management Call lasts one hour, and that ER had occurred just before, which is the standard case (hugely often- we consider it happens all the time). Therefore, thinking as of Paris time, with 6-hours delay with New-York, we can set the following table: Table of earnings category Source: Uncia AM. We use the earnings return by getting rid off the total return index to the idiosyncratic move, assuming a beta for each stock = 1. For more information, you can refer to the original paper by the author, Post Earnings Announcement Drift, a Price Signal? [1] Important: in the following development, return always refers to relative return of the stock versus its index (total-return). NASDAQ COMPOSITE – CCMP: average capitalization (

S&P High Yield Dividend Aristocrats ETF Performance Analysis

The S&P High Yield Dividend Aristocrats ETF is the SPDR S&P Dividend ETF (NYSEARCA: SDY ). We will take a look at the performance of SDY to see how it is doing versus its index, the S&P High Yield Dividend Aristocrats Index. See “How to Make an Investment Portfolio: 6 Steps to Better Investing” for a full understanding of how to make the best dividend-paying index portfolio. SDY tracks a dividend yield-weighted index of 97 dividend-paying companies from the S&P 1500 Composite Index that have increased dividends for at least 20 consecutive years. Here is a chart of the performance of SDY versus the S&P High Yield Dividend Aristocrats Index: (See our analysis below.) (click to enlarge) Source: Zephyr StyleADVISORTM Our analysis of this chart: Since inception, SDY has tracked its index very closely. SDY is tracking its index closer than the expense ratio. The expense ratio for SDY is 0.35% and SDY has only lagged its index by 0.26%. Here is a chart of SDY versus the S&P 500 Index: (click to enlarge) Source: Zephyr StyleADVISORTM Our analysis of this chart: During the beginning of the downtrend that started in 2007, SDY underperformed the S&P 500 Index. This seems counter intuitive, as you would think that companies with a 20-year history of dividend increases would be popular. Looking closely, you will find that several of those companies were banks, which did very poorly during the downturn. SDY is rebalanced quarterly and many of these struggling companies were replaced because they did not meet the 20-year screen any longer. In the end, SDY actually fell a little less than the S&P 500 Index. Since the bottom of the market in March of 2009, SDY has kept pace with the S&P 500 Index. This is a narrow fund with only 97 companies. You may have to be patient with this fund in the future if it underperforms. Keep in mind that it is rebalanced, which can help bring SDY back on track. Share this article with a colleague

Here Is Why The S&P 500 Should Not Be The Barometer Of Investor Success

Summary The S&P 500 and the Dow are often quoted on TV and by various media outlets when providing updates on the stock market. By doing this, the media is implicitly suggesting to investors that these indexes represent how the market is actually performing. Trouble is that not everyone has the same definition of “the market” and not every investor has a portfolio that is structured like “the market” – and probably for good. Benchmarks to gauge the performance should be consistent with actual portfolio strategies as opposed to using a widely recognized stock market index, such as the S&P 500 index. Far too often, individual investors measure the success of their investment portfolios, or the effectiveness of their financial advisors, relative to the performance of a well-known stock market index such as the S&P 500 Index (“S&P 500”) or the Dow Jones Industrial Average Index (“Dow”). While it is important for investors to have a tool to measure the success of an investment strategy against, it can be very misleading, and often misguided, if an investor chooses an index as their tool that is not consistent with their risk tolerance or investment objectives. For example, the S&P 500 and the Dow are often quoted on TV and by various media outlets when providing updates on the stock market. By doing this, the media is implicitly suggesting to investors that these indexes represent how the market is actually performing. Trouble is that not everyone has the same definition of “the market” and not every investor has a portfolio that is structured like “the market” – and probably for good reason . In an Investment News article entitled, ” When underperforming the S&P 500 is a good thing ” (sign-up required), author Jeff Benjamin claims that investors have become programmed to dwell on the performance of a few high-profile benchmarks. Benjamin goes on to state that, “…a truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any advisor who generated returns close to the S&P was taking on way too much risk, and should probably be fired.” The suggestion of having the financial advisor fired may be extreme, especially if an investor has instructed their advisor to build a portfolio to try and provide performance consistent with, or superior to, the S&P 500 ( or the Dow ) and recognizes the potential risk associated with that type of strategy. However, most investors do not have this large of a risk appetite and appreciate the benefits of diversification to help deal with market volatility if and when it occurs. To this end, many of the growth-oriented investors that we speak with at Hennion & Walsh are interested in portfolios that are managed to help deliver a reasonable return while also providing for some downside protection. As a result, investors generally do not have that large of a percentage of their portfolio assets allocated to the one asset class associated with these two stock market indexes. This asset class is U.S. Large Cap. To this end, Michael Baker of Vertex Capital Advisors stated in the same previously mentioned article that, “The S&P 500 really just represents one asset class – large cap stocks…and most investors only have about 15% allocated to large cap stocks.” Having all of their investment portfolios allocated to one single asset class, such as U.S. large cap, would have rewarded investors well since the last major market crash hit bottom in March of 2009. However, this does not mean that this will always be the case going forward nor has it been the case historically. The chart below from First Clearing shows the annual returns of several asset classes from 2000 to 2014. A quick review of this chart will show how well U.S. large cap stocks have performed since 2009. Since the media focuses on U.S. large cap indexes, investors have thus been constantly reminded of how well “the market,” or more specifically U.S. large cap stocks, has done for the past 5 years. By further reviewing this chart, however, investors are also reminded that this is not always the case. U.S. large cap stocks suffered significant losses in 2008 and 2002 and additional losses in 2000 and 2001. Additionally, while large cap stocks finished in the top half of asset class performance in each of the past four years, they have only achieved this ranking once over the eleven years prior to 2011. Asset Class Returns (2000 – 2014) (click to enlarge) Source: First Clearing, LLC, 2015. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Past performance is not indicative of future results. This chart is provided for illustrative purposes only and is not indicative of any specific investment. Asset class performance data based on representative indexes. You cannot invest directly in an index. Individual investment results will vary. The data assumes the reinvestment of all income and dividends and does not account for taxes and transaction costs. On the other hand, this chart attempts to illustrate the value of asset allocation with the asset class box named “Asset Class Blend” which is simply an equal weighting of all of the asset class indexes included on the chart. While I am not suggesting that such a blend is appropriate for all investors or all market environments and would likely include more asset classes and sectors to make the chart more comprehensive, the results shown in this chart still certainly demonstrate the potential benefits of diversification in down and/or volatile markets. Not inclusive of the potential fees for the implementation of each respective strategy or associated tax implications, $1,000,000 invested in large cap stocks in 2000 would have been worth $1,866,218 at the end of 2014. Conversely, the same $1,000,000 invested in this particular asset class blend strategy in 2000 would have been worth $2,831,257 at the end of 2014 based upon the annual returns listed in this Asset Class Returns table. $1,000,000 Investment Comparison from 2000 – 2014 (click to enlarge) Data source: Asset Class Returns (2000 – 2014) chart shown above in this post . Chart source: First Clearing, LLC, 2015. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Past performance is not indicative of future results. This chart is provided for illustrative purposes only and is not indicative of any specific investment. Asset class performance data based on representative indexes. You cannot invest directly in an index. Individual investment results will vary. The data assumes the reinvestment of all income and dividends and does not account for taxes and transaction costs. As a result, it is imperative that investors are honest with themselves about their true tolerance for risk. If they are truthful to themselves, their risk appetite should not change based upon the current directional performance of “the market.” If an investor is not comfortable assuming the risk of “the market” or a single asset class, such as U.S. large cap, in all market environments, then they should consider the following: 1. Building ( or maintaining ) a diversified portfolio, incorporating a variety of asset classes and sectors, consistent with their tolerance for risk, investment timeframe and financial goals. 2. Utilize a benchmark to gauge the performance of their investment strategy that is consistent with (1) above as opposed to using a widely recognized stock market index, such as the S&P 500, that may not be relevant, and is likely very unhelpful, to them. 3. Try to not make critical portfolio decisions based on short term performance results but rather consider longer term performance results relative to their own overall financial goals. 4. Avoid the temptation of being influenced by media reports on general market performance to measure the success of their own investment portfolios, or the effectiveness of their respective financial advisors. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.