U.S. MARKET UPDATE
During November, NDR’s global risk-off composite outpaced its risk-on counterpart by more than 500 basis points (bps), it’s largest one-month spread since March 2020. The growing risk-off appetite has been apparent in the Catastrophic Stop model (chart at bottom). At the beginning of the November, the model had an overall reading of 70, well above the threshold (composite reading of 40) for raising cash. However, by the end of the model the Catastrophic Stop model had fallen almost halfway to its critical threshold, its lowest level since the first half of 2020.
At the start of December, only one technical (internal) indicator was bearish. Global equity market upside participation (breadth) plummeted to its lowest levels in more than one year. At the start of the month, only 26% of global equity markets were trading above their near-term trends.
Two of the external (macro, fundamental, and behavioral) indicators were bearish at the end of November. High yield option-adjusted spreads (OAS) continued to widen last month, indicating an elevated risk outlook. Also, global shipping rates plummeted, which may reflect slowing global economic activity.
However, further deterioration from both price-based and macro-fundamental indicators is required for the Catastrophic Stop model to turn bearish. For now, the weight of the evidence recommends that the Smart Sector® strategy maintains full exposure.
Figure 1: Smart Sector Catastrophic Sell Stop Model
SECTOR PERFORMANCE UPDATE
Only Consumer Discretionary (XLY) and Information Technology (XLK) produced positive returns during November. XLK jumped by more than 400 basis points (bps), while XLY increased by over 100 bps. XLK has gained more than 300 bps and XLY has risen over 100 bps for five of the last six months.
Materials (XLB) and Real Estate (XLRE) each declined by less than 100 bps. It was only the second monthly loss for XLRE this year. Over the last six months, XLB has had an equal number of up and down months.
Consumer Staples (XLP) and Utilities (XLU) fell by more than 100 bps. XLU has fallen more months in 2021 than it has risen. XLP has declined during three of the last six months.
Industrials (XLI) and Health Care (XLV) each declined by more than 300 bps. Both sectors have declined by over 300 bps for two of the last three months.
Financials (XLF), Communications Services (XLC), and Energy (XLE) all dropped by more than 500 bps.
SECTOR ALLOCATION SUMMARY
Figure 2: Sector Allocation Summary
The Consumer Discretionary sector continues to have the largest allocation above benchmark. The sector’s trend has improved (chart at bottom) even though consumer credit conditions worsened. All the price-based (internals) indicators are bullish.
The Energy sector’s allocation remains overweight. The outlook is less bullish this month as the sector is reversing from an overbought condition and the U.S. Dollar has strengthened. Over 80% of the sector’s internal and external (macro, fundamental, and behavioral) indicators are bullish.
The Materials sector’s allocation improved to overweight status. The sector’s momentum and trend have improved. Two-thirds of the sector’s internal indicators are bullish. There were offsetting external indicator changes. Although gold futures have improved, reflecting a favorable environment, the Emerging Markets relative strength versus Developed Markets deteriorated, which typically coincides with Materials sector underperformance.
The Information Technology sector’s allocation remains above the benchmark. Near-term participation in the sector is no longer bearish, but the sector is no longer reversing from an oversold condition. All but one of the external indicators are bullish.
The Utilities sector is still greater than benchmark. Oil prices have weakened, and the sector’s near-term trend is reversing lower. The intermediate-term price trend is now favorable, as it reverses from an oversold condition. Two-thirds of the sector’s externals are bullish.
The Real Estate sector’s weighting is modestly below the benchmark. There were offsetting indicator changes. The sector’s trend has weakened as it reverses from an overbought condition. However, the environment for real estate is improving as economic conditions strengthen and homebuilding stocks are rising.
The Consumer Staples sector’s weighting improved, but it is still below benchmark allocation. Intermediate-term breadth improved as food inflation has risen.
Industrials’ weighting has dropped below benchmark allocation. The U.S. Dollar Index strengthened, and sector volatility temporarily receded. However, both intermediate- and long-term price momentum declined, indicating headwinds for the sector.
The Financials sector’s allocation has dropped below benchmark. The sector’s trend has deteriorated as relative risks rose and the yield curve flattened (chart at bottom). However, improving economic conditions are a tailwind for the sector.
The Communication Services sector’s allocation continues to be significantly below benchmark. Earnings revisions breadth has weakened, indicating an unfavorable outlook for the sector. All but one of the internal indicators are bearish.
The Health Care sector’s allocation remains strongly underweight. There are signs of improvement as the sector’s trend strengthened and relative risks declined. Earnings revisions breadth no longer reflects the same headwinds as last month. Still, no external indicators are bullish on the sector.
The Smart Sector® with Catastrophic Stop strategy combines two Ned Davis Research quantitative investment strategies: The NDR Sector Allocation and the NDR Catastrophic Stop.
THE PROCESS IS BASED ON THE WEIGHT OF THE EVIDENCE
The fund begins by overweighting and underweighting the S&P 500 sectors based on Ned Davis Research’s proprietary sector models.
Each of the sector models utilize sector-specific, weight-of-the-evidence composites of fundamental, economic, technical, and behavioral indicators to determine each sector’s probability of outperforming the S&P 500.
Sectors are weighted relative to benchmark weightings.
WHEN MARKET RISKS BECOME EXTRAORDINARILY HIGH — REDUCE YOUR PORTFOLIO RISK
The model remains fully invested unless the Ned Davis Research Catastrophic Sell Stop (CSS) model is triggered, whereupon the equity-invested position is trimmed to 50%.
The NDR Catastrophic Sell Stop model combines time-tested, objective indicators designed to identify periods of high risk for the broad U.S. equity market. The model uses price-based, breadth, deviation from trend, fundamental, economic, interest rate, behavioral and volatility-based indicator composites.
WHEN MARKET RISKS RETURN TO NORMAL — PUT YOUR MONEY BACK TO WORK
When the NDR CSS model moves back to bullish levels, indicating lower risk, the strategy immediately moves back to fully invested.
For more information, please contact:
Day Hagan Asset Management
1000 S. Tamiami Trl
Sarasota, FL 34236
Toll Free: (800) 594-7930
Office Phone: (941) 330-1702
Website: https://dayhagan.com/ or https://dhfunds.com/
NED DAVIS RESEARCH DISCLAIMERS
The data and analysis contained within are provided “as is” and without warranty of any kind, either express or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All performance measures do not reflect tax consequences, execution, commissions, and other trading costs, and as such investors should consult their tax advisors before making investment decisions, as well as realize that the past performance and results of the model are not a guarantee of future results. The Sector Allocation Strategy is not intended to be the primary basis for investment decisions and the usage of the model does not address the suitability of any particular investment for any particular investor.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight of the evidence approach that fits their investment needs.
Past performance does not guarantee future results. No current or prospective client should assume future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.
Day Hagan Asset Management is registered as an investment adviser with the United States Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the adviser has attained a particular level of skill or ability. Day Hagan Asset Management claims compliance with the Global Investment Performance Standards (GIPS®). GIPS is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Day Hagan Asset Management has been independently verified for the periods June 30, 2008, through December 31, 2020. To receive a GIPS composite report, contact Linda Brown at (941) 330-1702 or email at email@example.com.
References to “NDR” throughout refer to Ned Davis Research, Inc. Clients engaging in this strategy will be advised by Day Hagan and will not have a contractual relationship with NDR. Day Hagan purchases signals from NDR, and Day Hagan is responsible for executing transactions on behalf of its clients and has discretion in how to implement the strategy.
NDR is registered as an investment adviser with the Securities and Exchange Commission (SEC). NDR serves as the Signal Provider in connection with this strategy. The information provided here has not been approved or verified by the SEC or by any state or other authority. Additional information about NDR also is available on the SEC’s website at https://www.adviserinfo.sec.gov/. This material is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or to participate in any trading strategy. NDR’s strategies, including the model discussed in this publication, are intended to be used only by sophisticated investment professionals.
There may be a potential tax implication with a rebalancing strategy. Rebalancing involves selling some positions and buying others, and this activity results in realized gains and losses for the positions that are sold. The performance calculations do not reflect the impact that paying taxes would have, and for taxable accounts, any taxable gains would reduce the performance on an after-tax basis. This reduction could be material to the overall performance of an actual trading account. NDR does not provide legal, tax or accounting advice. Please consult your tax advisor in connection with this material, before implementing such a strategy, and prior to any withdrawals that you make from your portfolio.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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