On April 3, I had a meeting with Mark Arbeter, chief technical strategist at the S&P. Air Canada had lost my bags and I did not want to cancel the meeting. So, I decided to carry on, reaching 44th floor, 55 Water Street, New York, despite my Zara 'fancy' sweater and 'miner's' Levi's. The security downstairs, the east river look and the disproportionately taller building in the narrow streets gave you a feeling of walking on Dalal Street.
Sector rotation
Sam Stovall is the global strategist at S&P. He had identified five economic cycle stages in the market, namely, early expansion, middle expansion, late expansion, early contraction and late contraction. The market sectors move within these five stages. Technology and transportation perform in the early expansion, capital goods in the middle expansion, basic materials, energy, and consumer staples in late expansion and utilities in early contraction. The financials and consumer cyclicals outperformed in the late contraction stage.
Globally and locally
Why was the subject of sector rotation important globally and locally? Markets are dynamic systems, like a flock of birds, and though they have a certain character of moving as a group, the flock never moves in the same pattern. The flying pattern is different every time. Just like 30 stocks could define the Sensex 30, sectors could define the BSE 500. This is why Sam's work on sector rotation is an essential tool in understanding markets. It not only a new approach to interpret market dynamics but also guides in asset allocation.
Across sectors
Sam's work on sector rotation was not only relevant for intermarket technicians, but also for fundamentalists and market dataminers alike. Sectors move in and out of performance as the economic cycle moves. There was a time for cyclicals; there was a time for defensives - "When the going gets tough, the tough go eating, smoking and drinking - and to the doctor if they overdo it", "the truth about sell in May and go away", "as goes January, so goes the year".
Active to passive
If 90 per cent of the active does not beat the passive, and if 100 per cent of the active is costlier than the passive, believe me, the home-grown exchange-traded fund is more than a threat to the active fund managers. If the active fund manager can't be in the top 10 per cent of his class, consistently, year after year, basically be it Peter Lynch, he is fighting a losing battle. When resources are meagre, which the crisis has taught us, every basis point of cost is serious money. So if you, the fund manager, really want to be at the top of your class, you can't ignore sector rotation. This is your differentiator, your edge, your saviour. Because sooner or later you will be told, by that simple investor in the street, "don't tell me you beat your peers; tell me if you beat the index". And, by the way, she would be shrewd enough to understand the risk, and would know well that if you, the fund manager, were assuming more risk (active) than it was your job to beat the index.
Meeting Sam
While I was in the middle of an intense conversation with my senior Mark, he said, "Let me check if my boss is around." I think he should meet you. And before I realised I was with Sam Stovall, exchanging greetings, I did not hold back and told him about my amazing, without-bags beginning to my New York visit. Americans can always have a good laugh about Air Canada, and there are so many stories about missing bags. Even Mark shared one with me. The meeting ended with Sam handing me a signed copy of his book The Seven Rules, with a note encouraging me to 'continue connecting the dots'.
The author is CMT and founder Orpheus CAPITALS, a global alternative research firm
