What You Don’t Own
By Andy Hyer What a year it’s been for Energy. Its rout can be seen in the chart of XLE shown below: Price return only, not inclusive of dividends. Updated through 12/8/15 However, it is not just 2015 where Energy has been weak. Consider the relative strength chart below of the Energy Sector SPDR ETF (NYSEARCA: XLE ) versus the S&P 500 (SPX): (click to enlarge) Price return only, not inclusive of dividends. Updated through 12/8/15 As shown above, Energy has been weaker than the S&P 500 for the majority of the time since June 2008 – although the worst of the relative performance has clearly come in the last year or so. When a sector is weak, a relative strength strategy seeks to underweight that sector. After all, what you don’t own is every bit as important as what you do own . Consider the chart below of the Energy exposure in the Dorsey Wright Technical Leaders Index (used for the PowerShares DWA Momentum Portfolio ETF (NYSEARCA: PDP )): As of 10/1/15 This index is constructed by taking a universe of approximately 1,000 U.S. mid- and large-cap stocks and ranking them by their PnF relative strength characteristics. The top 100 stocks make it into this index. Each quarter, the index is reconstituted to kick out any stocks that have lost sufficient momentum and to replace them with stronger names. One of the unique characteristics of this index is there are no sector constraints. If a sector is weak, it may have little or no exposure in the index. This quarter is now the 4th quarter in a row where PDP has had zero Energy exposure. Much is made of how momentum strategies seek to own the “hottest” stocks. Perhaps, more should be made of momentum strategies seeking to avoid the biggest losers. In the end, that matters every bit as much. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.powershares.com for a prospectus on PDP.