Tuesday, February 5, 2013

We had been seeing some foreign funds creeping back into the upper ranks but this week is looking like a turning point.  We see more than usual turnover in today’s top ranks but Quant’s US focus has become even more pronounced.  As Europe becomes enveloped in political scandal, and even worse, soccer scandals, the S&P 500 sees two funds tracking it into 1st and 2nd place this morning.  But SPDR’s SPY and iShares’ IVV may not be signaling another leg up in the US market but a hiding place from a worldwide selloff.  Quant predicts relative performance, not market direction, and while those two funds solidify their positions in the top 10, some bomb shelter funds are among today’s biggest movers.

Jumping 193 positions overnight into 10th place is the iShares High Dividend Equity Fund (HDV) making its first appearance in the top 10.  Those high dividends were out of favor at the end of last year when tax avoidance was dominating the market.  The weakness in November and December makes the fund cheap enough to get an 85.6 Fundamental Score and its technicals are also looking better now with scores averaging 70 in that category.  The fund is exposed to those sectors that will do well if last quarter’s GDP contraction gets worse.  Its top three sectors are health care, consumer staples and telecoms which all tend to be the last things people give up in a recession.  If we are going into a recession, investors will probably reduce volatility, which may explain today’s 13th place fund. The iShares MSCI USA Minimum Volatility Index Fund (USMV) jumped 287 positions overnight and last got near these ranks on November 16th which was a good day to buy it although it has lagged the S&P’s big run since then by a couple of points.  That was a one day appearance in the top 25 so we’ll see if this time becomes more durable.  Today’s appearance is driven by a high Fundamental Score of 86 and again improving technicals averaging 73.5.  It also has constituents that should outperform in an economic contraction as health care and consumer staples lead its sector exposure.  This fund’s most notable attribute however is its very low 1.23 Red Diamond Risk Rating, the third lowest of all 1508 funds in today’s database.  HDV’s risk is also low with a 2.77 Risk Rating which is 147th on the lowest risk list.

The closest Quant comes to making a directional call is when high or low risk funds dominate the ranks.  Today we see the average risk ratings of the top 10, 25 and 100 funds all fall below 4 which is unusually low.   So although those S&P 500 funds in 1st and 2nd place may outperform over the next few months, it could mean outperforming a declining market.  We haven’t yet studied the correlation between our Risk Ratings and market performance but we have studied the performance of our high ranking funds.  Those reports are on the publicly available part of our site and they give us confidence that these low risk funds will outperform in coming months.  Thanks for reading and as Sgt. Esterhaus says, let’s be careful out there.

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