Emotion trumps fundamentals in this stock market

The Covestor Rockledge L2 strategy gained 2.8% in November after management fees. The Covestor Rockledge Group L2 portfolio has held positions in industrials ETFs such as the Select Sector SPDR Industrial (XLI), Select Sector SPDR Healthcare (XLV) and Select Sector SPDR Consumer Discretionary (XLY) since July inception.

In November, the positions in XLI, XLV and XLY gained 3.6%, 4.6% and 3.5%, respectively. During the month of November, some new data came in, and some signals changed. As a result, I added the Select Sector SPDR Consumer Staples (XLP) and Select Sector SPDR Materials (XLB) ETFs at the expense of a position in Select Sector SPDR Energy (XLE). These were closed out by month end and replaced with a position in Select Sector SPDR Financials (XLF).

The Rockledge L2 strategy typically holds positions in three sectors. But since inception, the strategy has taken on holding four sectors, and even briefly, five. This is predicated by the unusual market conditions. I believe that to mitigate the risks in the market today, holding a more diversified portfolio is warranted versus the more concentrated three position portfolio.

Against a backdrop that continues to push the stocks of the S&P 500 higher, the Rockledge L2 strategy has kept pace with the market. These are not ideal conditions for the L2 strategy. In these periods of high correlation, all sectors tend to react in a similar way.

In my opinion, corporate fundamentals have taken a back seat to investor emotion. That is, traditional factors like earnings growth and sales growth today seem to be less important than macro-economic (budget balancing) and political (debt ceiling) discussions with respect to how the markets are doing. Furthermore, the Federal Reserve continues to signal a low rate environment, pushing money from the sidelines into stocks.

We believe that the persistently high correlations and lessened regard for corporate fundamentals will subside.  When the market begins to recognize good sector fundamentals against weakened sector fundamentals, the Rockledge L2 strategy should capitalize on these dislocations.

DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Author profile

The Rockledge Group
The Rockledge Group

The Rockledge Group focuses on alternative strategies and sector investing. We focus on delivering positive risk-adjusted returns by forecasting the relative sectors within the S&P 500 Index.

I am Alex Gurvich, co-founder The Rockledge Group. I have managed the company’s strategies for the past seven years.

Prior to founding Rockledge, I worked as a venture capitalist with General Electric’s GE Capital. I also previously worked as management consultant with Bain & Company, and worked as an engineer/physicist for a scientific instrumentation company.

My BA degree is in Physics from the University of Chicago, and I hold two Masters Degrees – an MBA from INSEAD and a MS in Financial Engineering from New York University Polytechnic Institute. I also serve as an Adjunct Professor of Finance at Pace University, Lubin School of Business.