Thoughts on leaders

What are market leaders? There are several ways to define this concept. 

It could refer to pure percentage return over a certain period: day, week, month, quarter, year.

It could refer to position relative to previous highs and lows. 

Or it could refer to position relative to pivots.

Of course when I refer to leaders I am usually referring to #3 involving pivots, but let's think about things a bit. 

EEM was a percentage leader over USA indexes for much of 2016 YTD. From 12/31 to 9/30 (Q3 end), EEM was up 16% vs SPY 6%. Since then however, EEM has dropped and SPY rallied, so current YTD performance figures are EEM +9.5% vs SPY 8.5%. EEM still ahead, but severely under-performing from 11/9 on.

If we think about relative highs and lows, though, EEM was nowhere near a leader when we look at longer term charts. Its all time high was 2007, and even still well under its 2015 high. Often what has been down the most will have a large percentage move up off lows, yet still can be challenging to buy and hold long term.

Another example is NDX. From 2013, SPX had made new all time highs yet NDX had not; but NDX has been the better thing to own among main USA indexes 2011-15 in terms of percentage return. 

So I find percentage return over a certain period and status of new highs both somewhat lacking. What I usually mean by "leader" is from The Pivotal Perspective - an asset class that holds pivots when others break and recovers pivots before others, or clears resistance before others. This may not mean leading by percent and it may not have direct relation to highs and lows. We could also apply this concept to moving averages on various time-frames as well. 

A few examples that worked well this year:

TLT, early January. When stock index pivots were breaking everywhere I looked, it was not hard to find something above pivots - TLT. As of 1/6, TLT had jumped above 1HP, Q1P and JanP where almost every stock index had broken multiple pivots; in fact, as of 1/6 nearly everything was below all pivots. On 1/7 NDX caved below its YP too, further confirming risk off and safe havens on. TLT was one of the best things to own through July 2016, 6 months from the initial entry. 

GLD, late January. Similar logic as TLT. As stock indexes were below pivots or near major support, GLD was above 1HP, Q1P and JanP for the 2nd time as of 1/25. 

INDU, 2/11 and 6/27. In both cases, INDU held yearly support as others, even SPX and NDX, broke slightly. This is why I emphasized the Dow on the first buys, as well as global stocks which had led on recovering monthly pivots too like EWZ, RSX and EEM.

EWZ, February and March (and later too). EWZ was mostly above its February pivot, moving below only 2 trading days that month, when nearly every other index was below on FebS1s. It was one of the first to recover a quarterly pivot on 3/3 as well.

SMH / SOXX. Along with the Dow, when looking for strength to buy, I noticed that both semi-conductor ETFs recovered a long term pivot before anything else I saw on 3/1. This was the first time I noticed leadership on SMH / SOXX, which has led at other points as well. 

XLF. As all USA mains were below Q4Ps in October, this caught attention by remaining above. 

All these were noted and caught in real time on the blog and/or SPY daily comments. But a couple others were tougher to catch and only possible with a more nuanced, synthetic approach. 

QQQ from July. QQQ broke its YP on 6/27 and still below Q2P on 6/28; and was even under D200 until 6/30+. So it did not hold when others did, and did not recover pivots sooner than others. Yet from there it turned into the next USA main index leader. How to catch that? Safe havens were toppy but only started coming down after 7/6-8. This is somewhat hindsight exercise, but the tell was two small down bars on the QQQ quarterly chart. This meant tech had, over 6 months, made very mild pullback while maintaining long term uptrends. The big institutional players saw that and piled in, especially as the growth theme returned to markets and safe havens continued lower. 

IWM from 11/9 on. IWM went from YR1 all the way down to YP and even broke its YP 11/2-4. Yet it raced back and was first conclusively above YR1 on 11/11, with DIA fractionally above YR1 that day as well. SPY followed above YR1 on 11/15. Yet SPY hadn't come close to any long term weakness, so how to shift over to IWM as a choice for longs from 11/9 on? Both SPY and IWM recovered all pivots on 11/9 but selecting IWM has made huge difference in gains. IWM did make new 2016 highs before SPY; SPY new yearly high on 11/11 (same day as pivot move), with SPY not catching up in that regard until 11/21. 

In addition to anticipated policies of Trump, the other tell here is $USD which has also made a huge rally from 11/9 on. From the first day that $DXY closed above 100 on 11/15, IWM is up a further 3.4% vs SPY paltry 1.4% as I type. Factoring in DXY strength from October on could have meant less emphasis on global stocks and globally influenced indexes. This is not the first time that IWM has led USA with a stronger USD. 

But if you didn't jump in immediately, then IWM was clearly above YR1, and making new 2016 highs, and leading by % gains after election (along with financials) from 11/11 and the better choice for any later longs.

Bottom line here is we are search of next leaders. These are easier to buy and hold and will usually give the best gains until there is a change in leadership. Often what holds up best in market drop is the next leader, like XLF recently. Yet sometimes a new quarter or new macro condition can mean new leadership, like IWM. Ultimately we want to do this:

Always consider what is holding pivots or recovering pivots first
Keep some eye on percentage return from a certain period
Keep some eye on relative highs and lows
Consider longer term charts, monthy and quarterly, for the best trends
Consider big picture macro factors, such as interest rates, $USD, and larger themes of growth vs value, developed vs emerging, commodity impact, etc.