[The following "ETF Industry Perspective" is sponsored by Nasdaq Global Information Services.]
With so much noise threatening to affect the financial markets—Brexit, the U.S. election, instability in the Middle East and Wikileaks—how do you filter what really matters to you and your clients? At Dorsey, Wright & Associates, a Nasdaq company, we use the tried-and-true Point & Figure methodology to cut through the clutter. Our DWA Technical Research Platform provides our analysts and thousands of clients a simple, objective and reliable view of the markets. With that, here is our Q3 Market Insights Recap:
The stock market spent the majority of the summer months moving sideways in a tight trading range. The S&P 500 finished the third quarter up almost 4%, and is sitting on a gain of 7.8% so far this year.
S&P 500: Year-To-Date Performance
For a larger view, please click on the image above.
International equity markets were a bright spot, and outperformed domestic markets. Developed markets finished up 6.5% and emerging markets finished with a gain of 9.2%. Bonds also finished in positive territory, with a 0.5% gain. Commodities were a weak spot in the third quarter. After strong gains in the first six months of the year, the S&P GSCI Commodity Index gave back 4.2% over the summer and now sits at a gain of 5.3% for the year-to-date.
The DWA Platform continues to pinpoint rotation below the surface in a number of different asset classes. In the U.S. equity markets, there has been a momentum shift out of areas such as high-dividend and low-volatility stocks. The relentless reach for yield drove many investors into stocks instead of bonds, and drove valuations to historically high levels. The same valuation issues cropped up in low-volatility stocks, which have been quite the hot ticket for the last year or so. These are not the areas that usually lead a robust bull market. Low volatility, especially, tends to lead during down markets. As a result, there was a lot of hand wringing about how solid the market actually was with that kind of leadership. We felt the leadership we were seeing was more a result of investors' preference for yield (and the lack of good fixed-income options) rather than an indictment of the overall market.
The platform points to new leadership that appears to be emerging in what is traditionally considered positive for a strong bull market. Small-capitalization stocks have had spotty performance for a while, but they really picked up steam in the third quarter. The Russell 2000 Total Return index finished with a gain of 9%, moving it well ahead of the S&P 500 for the year. Technology stocks also dramatically outperformed what could be considered the old leadership (utilities, consumer staples and low volatility) over the summer. The relative improvement in these higher-volatility areas shows investors are gaining more confidence in the market. Confidence is an incredibly important piece of the puzzle for momentum strategies, so we are looking at this new development very favorably.
XLK Vs. XLU: Year-To-Date Performance
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