All those who wanted nothing more than to end 2015 in the black were well-rewarded for staying long equities last week as Santa delivered not only high temperatures but a strong rally (albeit on low volume). The S&P 500 gained 2.76% and gave those who put off their annual reallocations a chance to end the year on a high note. While most will tell you that looking for investor signals amid such a weak rally is like trying to measure the Grinch’s heart, we sifted through an otherwise stellar week for clues on the shape of things to come. While many investors seem content to ride out the clock and hope their large cap positions keep paying off for another year, our ETFG Behavioral Models seem to suggest that sticking to an old playbook might be a surefire way to end up on the naughty list in 2016.
Human beings are hardwired to find patterns in nearly everything, which might be one reason why investors love McCallan tables and technical analysis so much, looking for tradable patterns in the history of annual returns hoping last year’s losers are next year’s winners. For some investors, that means studying their charts and wondering if Caterpillar’s 6.5% rally last week means that the “Dogs of the Dow” might bite again in 2016, but others went further afield in their quest for potentially extreme outperformance. One of the worst performing asset classes, MLP funds, saw their Behavioral Quant scores surging last week on heavy volume with the UBS ETRACS Alerian MLP Infrastructure Index ETN (MLPI) making the list of top score changers thanks to a 14.5% return that blew away the broader equity markets! But MLPI wasn’t the only fund that saw its score surge last week as it seemed that almost every other fund was getting in on the action like the iPath S&P MLP ETN (IMLP) up 14.76% although there was no premium being paid for higher yielding funds like the Yorkville High Income Fund (YMLP) up a mere 12.89% despite its ETFG Behavioral Score surged more than 13% for the week. With even the broader energy sector funds like the Energy Sector Select SPDR (XLE) outperforming the S&P 500 last week, many will ask whether we’re on the cusp of a recovery in energy stocks or are we just witnessing a short lived triumph of hope over fear?
It’s hard not to be suspicious of any MLP rally after many funds found themselves facing the last two weeks of December down somewhere between 40%-50% on the year and that price erosion led many to sport double digit yields which is hard for even the most cautious investor to pass up. Last week’s big rally might just seem to be another case of investor greed taking charge, a big part of the dogs of the dow and other value investing strategies is the belief in ‘mean reversion’ or that the performance of different asset classes will converge over time and eventually make all losers winners and vice versa meaning any momentum reversal could be the start of a new uptrend. MLP funds have been slowly gaining momentum throughout the second half of December, partly after reaching oversold levels following Kinder Morgan’s announcement of a dividend cut that led many to conclude the sector was close to rock bottom which sentiment got a big boost on Monday when ONEOK Inc (OKE) offered positive guidance on 2016 and left its dividend rate unchanged. Unexciting as that may sound, it helped draw investor attention to the fact that many MLP payouts have remained largely stable and could offer strong upside potential to the more nimble.
Another factor to consider in the long-term case for MLP’s is that they were just one of the sectors with an inverse correlation to the U.S. dollar that received a strong boost from the bucks slight losses last week as the Powershares DB US Dollar Index Bullish Fund continued to struggle following the Fed’s first rate hike in six years. Among the biggest winners was the WisdomTree Global Natural Resources Fund (GNAT) that delivered a 5.14% return last week as its ETFG Behavioral Score rose over 94% but consider carefully what’s in your fund before rushing out to add natural resource exposure back to your portfolio. GNAT’s struggled against other funds in its space this year thanks to a large energy allocation, nearly 50% of its portfolio, that many other funds in the space lack as the average natural resources fund only has a 43% allocation to the sector according to Morningstar. The sector heavyweight fund remains the iShares North American Natural Resources ETF (IGE) and it’s 83.5% allocation to energy stocks would seem to be a slam dunk for energy hungry investors but the fund also has a 1.7% allocation to gold stocks while the MarketVectors Natural Resources Fund (HAP) has a 5.7% position in the miners which helped it outperform both IGE and GNAT last week. But for those looking for a more balanced (and less political) solution, GNAT might be a good addition to your watchlist.
With traders coming back from the holidays and just four days until New Year’s Eve, we can’t wait to see what twists and turns are waiting for investors but it’s safe to assume that sticking with an old game plan is a recipe for trouble at some point!
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