The serendipitous nature of investment research always amazes me.
I can’t begin to count the times in my career when I gathered data to resolve a hypothesis, only to have it lead me in an unexpected direction.
This makes my work interesting, challenging and — I probably shouldn’t admit this — a bit of FUN.
It happened again in what I thought would be a cut-and-dried display of equity ETF leaders and laggards on the current bull market’s March 9 five-year anniversary. By the end of this article, you’ll know why I looked at the data for a few seconds and gasped …
… “This is an exercise in investment trend analysis!”
Barring a catastrophe, the current bull market will enter its sixth year when U.S. stock exchanges open Monday. But will it stay there?
Old Bull, New Tricks
We had corrections in 2010 and 2011 and a disappointing January this year. Nevertheless, the bull market that lifted stock indices from a dismal bottom on March 9, 2009, remains intact.
It is mature for a bull market, but with the economic expansion yet to show many signs of overextension, the upswing could beat the odds by producing outsized returns for some time.
Using ETF total returns, here are the sectors that have occupied the top and bottom tiers in terms of performance.
Let’s start at the top …
ETF Leaders Since the Bear Market Trough
Five years ago, close to the nadir of the Great Recession, farsighted investors figured the Internet was finally poised for big things.
And so, a pair of Internet stocks rewarded them with returns over 35% annually since then.
All the fanfare about cracking the genetic code a few years earlier produced results, too, as you can see in the 35%-plus five-year annualized returns for the Power Shares Dynamic Pharma ETF (PJP)and the First Trust NYSE Arca Biotech Index ETF (FBT).
But tech and pharma (and, by proxy, pharma-tech — one of my favorite sectors right now) weren’t the only winners. Good old-fashioned shopping — much of it taking place online — also made a strong showing.
‘No Holding Back the U.S. Consumer’
During the recession, every retail sales and consumer sentiment indicator reminded us how consumers account for 70% of U.S. GDP.
We feel it when they go away. But as it turns out, resilient U.S. consumers — bored by the strains of prolonged economic contractions — get overly eager to resume their acquisitions of goods and services.
The proof: After the two Internet winners and the pair of pharma/biotech outperformers, the next six winners in the table represent various parts of the consumer sector.
Some super-smart investors knew that there is no holding back the American consumer.
Interestingly, only SPDR S&P Retail (XRT) is what you might call a “plain-vanilla” consumer play. Two of the leading consumer ETFs are big-ticket “discretionary” niches.
Market Vectors Gaming (BJK) undoubtedly drew some gains from Macau exposure, while the other two represent media and entertainment. (I discussed PowerShares Dynamic Media (PBS) in more detail last week.)
So, Who Were the Losers in the Big Bull Market?
Of the 10 ETF laggards over the past five years, seven came from the alternative energy sector, if we can fairly describe Market Vectors Uranium+Nuclear Energy ETF (NLR) as “alternative energy.”
Two other laggards invest in gold mining stocks.
ETF Laggards Since the Bear Market Trough
Rounding out the bottom 10 is SPDR S&P International Utilities ETF (IPU), whose 5.2% annual return over the past five years didn’t match any U.S. utility selection.
The laggards section is what made me jump back and determine that only trend analysis could explain this data in full context. When studying trends for members of my Global Trend Traderservice, I analyze a slew of factors, including:
- EMERGING TRENDS — when getting in on the ground floor can produce outsized profits.
- TREND REVERSALS — which can signal the right time to enter or exit an investment.
- INFLECTION POINTS — that indicate major upward or downward shifts in an existing trend.
- TREND DURATION — to determine how long the trend is likely to persist.
- VARIATION MEASURES — for determining how much a trend might deviate from its path.
In addition, my analysis includes a number of other factors, including correlations, efficiency metrics, measures of statistical significance and many more.
Obviously, alternative energy and gold mining were not great investment choices five years ago. Those downtrends abruptly shifted in the last two years, and those who correctly identified the turning points enjoyed some huge gains.
A Leadership Change for the
Next Leg of the Great Bull Run?
All of the alternative energy ETFs on the laggards list show double-digit percentage gains over the past 12 months, with Guggenheim Solar (TAN) and Market Vectors Solar Energy (KWT) ahead by triple-digits in the last year.
In fact, I have been closely tracking these for some time and have held positions in the Global Trend Trader model portfolio.
Similarly, gold-mining stocks show signs of reversals after multi-year weakness.
The Market Vectors Gold Miners ETF (GDX) and PowerShares Global Gold & Precious Metals (PSAU) have climbed 22.2% and 20.0%, respectively, for the year to date. I have my eye on this group also.
As for the leaders, my analysis indicates that following the dot-com shakeout at the turn of the century, the survivors were on their way to participation in a long, sustainable uptrend.
The same applied to biotechnology, which spurted and then pulled back following groundbreaking discoveries in the human genome a dozen years ago.
The more-traditional pharmaceutical industry suffered for years from sparsely filled product pipelines. More recently, however, the industry has quietly achieved success after success for new products.
Again, I see a sustainable, steeply elevated trend for this sector. For those reasons, tech stocks andpharma/biotech stocks and ETFs — both domestic and international—have been frequent components in my model portfolios.
The retail sector gave investors a good ride out of the Great Recession’s ugly bear market, but the group’s 2014 performance has been uneven. As with all sectors, I constantly and carefully evaluate this group to determine if a trend reversal is in the works. .
So while the Great Recession and accompanying bear market were painful, the five years since the bottom have been kind to equity investors. I’m hard at work to keep those positive returns coming.
P.S. See my recent biotech observations here: 3 Ways to Strengthen Your Investing DNA.
Rudy Martin, editor of Global Trend Trader, is the President at Acamar Global Investments, with 25 years of experience serving institutions and high net-worth individuals.
Rudy started his investment career in 1983, co-managing a $ 2 billion private investment portfolio for Transamerica. Later, he went on to Wall Street as an equity analyst for Dean Witter and traveled globally, serving major institutional equity investors. In 1995, he joined Fidelity Investments as a Senior Investment Analyst for a series of multibillion-dollar fund portfolios.
During his career, Rudy has received awards for institutional investing and is widely quoted in the financial press and on television about topics related to global investing and emerging markets. For more information on Global Trend Trader click here.