Tuesday, October 13, 2015

A Look At The Current Rally

Even after today's modest pullback, the S&P 500 is still up over 4% so far in October.  Bespoke Investment Group notes that the average stock in the S&P is up more than 6% since the market hit its recent lows on September 29th.

In an October 9th study, Bespoke took a look "under the hood" of the current rally and made some interesting observations.  Chief among them being that this rally looks a bit different than many of the recent past given that it's been lead higher by the "most unloved, beaten-down names, while prior market darlings have lagged."

In the study they broke the S&P into 10 groups of 50 stocks based on each stock's performance from the index's 5/21 all-time high through its 9/29 low.  They then calculated the average performance of the 50 stocks in each decile during this current 2 week rally.

The chart below shows the results.  The decile labeled "Best" is the group of 50 stocks that performed best during the 5/21 - 9/29 period.  That group has returned only 3.7% since September 29th.  Meanwhile, the 50 stocks that performed the worst over the 5/21 - 9/29 period are up an incredible 15.4% during this bounce.

The chart below from Stockcharts helps to further illustrate the recent rotation in leadership as we see Energy, Industrials and Materials, three of 2015's biggest laggards,  leading the way over the last two weeks.

It's a bit early to draw any hard conclusions from the last 10 trading days.  We're not ready to concede that these sectors are poised to take the market even higher as they were the groups most deserving of an oversold bounce.  We're also not sold on the idea of the overall market being completely out of the woods here.  There was considerable damage done in August and September and we'll need to see some more signs of health before taking anything more than our current reluctantly bullish posture.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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