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Leadership is rotating.

Written by: Benjamin Bimson CIMA® / BCJ Financial Group

A few weeks back I wrote about the normality of narrow leadership in equity indexes. An interesting thing has been happening in the past week. Leadership has been turning around and some of the stocks that previously were a drag on the equity indexes are making gains while tech stocks have had a setback.

At the time of this writing, the S&P 500 was up 7.734% YTD. The leadership can be seen clearly in the following chart. Notice however, that the S&P 500 is not down dramatically like the formerly leading stocks.

 

Chart Source: BCJ Financial Group

Chart Source: BCJ Financial Group

 

It is more striking to examine a sector map of the S&P 500 showing that most of the stocks losing in the past week are exactly the ones that led YTD and vice versa!

Sometimes the heat maps are much more visually indicative of what is going on. The following heat map is the past 3 months. I am showing the last weekly impact on the index with green indicating positive performers in the past week and red indicating negative performance in the past week. The height above or below the grey “0” line indicates positive or negative impact over the past 3 months.

It is interesting to see how the biggest gainers have been nearly 50% of the gain, but losses have had less impact. This is where leadership changing is very helpful to the index investor.

 

Chart Source: BCJ Financial Group

Chart Source: BCJ Financial Group

 

There are many potential reasons for the recent leadership changes. One possibility is simply that investors are trimming holdings of the tech stocks that have soared in the first 6 months in anticipation of potential slower growth in the second half of 2017.

The beginning of 2017 came with high hopes that the new administration would bring a host of economic stimulating policies to the US economy. As various negotiations and political struggles have dampened the hope that these policy changes can take effect in 2017, the market has remained resilient. That is a good sign for the near term.

One place that should be watched closely is corporate earnings. If corporate earnings disappoint, it is possible that the stock market resiliency may fade. Ned Davis Research put together a chart of S&P 500 consensus earnings per share (EPS) in year/year percentage change as estimated in November 2016, February 2017 and May 2017. As the hopes have been pushed out for medical, tax and infrastructure reform the estimates for growth have changed. Here is what the chart they produced looks like.

 

Chart Source: Ned Davis Research

Chart Source: Ned Davis Research

 

If earnings growth does not pick up as expected, disappointment – along with the current high valuation of stocks – would put serious pressure on stocks and safe investments would be expected to outperform.

Although the current expectations do not call for any immediate indications of a dramatic change to a bear market or recession in the near term, political risks and earnings growth disappointments could increase volatility. We are watching to see if the leadership change is transient or whether it is a more meaningful change.

 

 

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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by BCJ Financal Group. This is for general information only and is not intended to provide specific investment advice or recommendations. It is suggested that you consult your financial professional with regard to your individual situation. Comments concerning past performance are not intended to be forward looking and should not be viewed as an indication of future results. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-496

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