Edition #18 - 6.8.2021
Relative Strength of Sector ETF's & Central/South America Races For Bitcoin
Economy:
Surprisingly, there wasn’t any economic data, news or info that caught my attention yesterday. All eyes are focused on the May 2021 inflation data that will be released on 6/10.
Stock Market:
I saw some great data from Adaptiv on Twitter that highlighted the largest increases in relative strength for a variety of thematic or sector ETF’s. Relative strength is simply measured by dividing the performance of any particular stock or security by an underlying index. When evaluating the relative strength of almost any stock, the underlying index it is most often compared to is the S&P 500. According to Adaptiv, here are the five ETF’s that had the most significant increase in relative strength over the preceding 2-week period, starting with the largest increase:
Invesco Dynamic Leisure & Entertainment ($PEJ)
S&P 500 Auto Parts & Equipment Index
S&P 500 Auto Components Index
SPDR S&P Aerospace & Defense ($XAR)
SPDR Emerging Markets Small Cap ($EWX)
This is a great list and even highlights two major themes that I’ve been mentioning in this newsletter: consumer discretionary/retail & auto. My very first newsletter included specific callouts for consumer discretionary (in which the final 3 were related to autos): $CROX $YETI $PII $DKS $ASO $HIBB $FL $GRMN $STX $DELL $HPQ $SONO $FND $SITE $TREX $BECN $TGLS $FBHS $DE $XPEL $ORLY $AZO. In Edition #6, I called attention to the dynamics in the used car market & mentioned the following stocks as my favorite plays in that space: $XPEL $ORLY $AZO $CAR $CVNA $PAG $AN.
From a fundamental perspective, I’m not surprised to see dynamic leisure & entertainment and the two auto indices in this group. I’ve covered those fundamental factors ad nauseam on this newsletter and won’t repeat it here now. The aerospace & defense fund is certainly more of a surprise on the list, but I’m very familiar with 60% of the top 10 holdings in that ETF and think they are all top quality companies to invest in from a fundamental perspective. Emerging market small caps ETF’s are something I personally avoid in my portfolio. While I’ve historically been willing to trade small cap companies, the emerging market factor always gives me pause. I did some quick research into this ETF and only recognized two companies in the top 10 holdings, so I just find it more difficult to know what you’re investing in. With that said, I took a look at the industry concentrations and can see why it’s been performing so well (+18% YTD). At the present moment, basic materials, financials, energy, and consumer discretionary comprise more than 74% of the fund’s allocation. Broadly speaking, these have been the market-leading sectors so far YTD & continue to have a high degree of momentum.
Conversely, here are the 5 biggest declines in relative strength over a two-week period:
Global X FTSE Portugal 20 ($PGAL)
iShares U.S. Healthcare Providers ($IHF)
SPDR Health Care Select Sector ($XLV)
iShares Global Tinder & Forestry ($WOOD)
VanEck Vectors Pharmaceuticals ($PPH)
I’m definitely shocked to see $IHF & $XLV on this list, as they are some of my favorite funds to construct the foundation of a portfolio & they’ve performed very well so far this year. YTD, $IHF is +13.3% while $XLV is +8% vs. the S&P 500’s +12.5%. They’ve definitely lost steam over the last few weeks, declining by -3.5% and -2.5% respectively, but I believe they will continue to produce strong long-term returns. $WOOD has been a direct beneficiary of the explosion in lumber prices since the COVID lows last year, but is facing pressure after a recent consolidation in lumber prices. Hard to say where this goes from here, but a continued pullback in lumber prices wouldn’t surprise me over the short-term. I actually exited two lumber REIT’s over the last month as I felt that they were getting over-extended.
Cryptocurrency:
In yesterday’s report, I highlighted the major announcement by El Salvador’s President Nayib Bukele to make Bitcoin legal tender in the nation. It was clear that this was the first domino to fall, and even if it was a small domino, the ripple effect that it creates could be substantial.
In the wake of El Salvador’s announcement & proposed bill, several politicians throughout Central & South America have made important & relevant statements in regards to their country’s adoption of BTC. Paraguay’s Deputy of the Nation and member of Congress, Carlitos Rejala, posted the following statement while retweeting an article from The Street on Bitcoin:
As I was saying a long time ago, our country needs to advance hand in hand with the new generation. The moment has come, our moment. This week we start with an important project to innovate Paraguay in front of the world.
Rejala has had multiple posts since that statement, including the following:
Working with @juanjobr and the Paraguayan crypto community in order for Paraguay to become a hub for the crypto investors of the world and subsequently to be placed among the ones on the cutting edge of digital technology.
Then, a statement from a Congressman in Panama, Gabriel Silva, echoed the same sentiment by retweeting Nayib Bukele’s post about Bitcoin:
This is important and Panama cannot be left behind. If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies. We will be preparing a proposal to present at the Assembly. If you are interested in building it, you can contact me.
It’s important to note that the USD is the legal tender currency in Panama, and is also widely accepted in Paraguay. Representatives from Brazil and Argentina have also voiced their support & intrigue by El Salvador’s announcement. The race has started.