Is Leaders-to-Laggards Rotation a Sign of Things to Come?

Things can change fast in the stock market, and nothing makes that clearer than the action over the past week. Leaders are starting to lag, while laggards are starting to lead. And if I’m right, that may be a sign of things to come – later this summer and beyond!

Let’s start with some background. For the first five-and-a-half months of this year, it was an “all tech, all the time” rally. Tech stocks like Facebook (FB, Rated “A-”), Apple (AAPL, Rated “B-”), Amazon.com (AMZN, Rated “C”), Netflix (NFLX, Rated “C”), and Alphabet (GOOGL, Rated “A-”) … collectively known as the “FAANG” stocks … led the way, as my colleague Mandeep wrote earlier this week. Financials, industrials, and lowly energy names stagnated or tanked.

But last Friday, the Nasdaq Composite fell by 1.8% while the Dow Jones Industrial Average closed at a record high. One of the strongest of this year’s growth stock darlings, chipmaker Nvidia (NVDA, Rated “B”), soared above $168 out of the gate that day … then plunged to as low as $142-and-change.

Those kinds of growth stocks tried to find their footing earlier this week. But it was a relatively tentative rebound. Meanwhile, VALUE stocks in down-and-out sectors performed much better. In the five days through Wednesday, for example, the SPDR S&P 500 Growth ETF (SPYG, Rated “C+”) showed a total return of negative-0.7%, while the SPDR 500 Value ETF (SPYV, Rated “C+”) sported a return of positive-1.5%.

What triggered the leaders-to-laggards shift? It’s tough to pinpoint a specific catalyst. It’s not like one of the FAANG names warned of lousy earnings, or a bunch of analysts came out and downgraded the group. Nor did OPEC announce some new production cuts (which would help energy take up the mantle). Plus, the Federal Reserve didn’t hike interest rates (a move that would be expected to help financials) until Wednesday.

So what does this mean for ETF investing going forward? Well, I’ve seen dramatic shifts like this before. My experience is that they usually herald a longer-term trend change. Just look at what happened in 2016.

During the first half of last year, gold miners, utilities, consumer staples, and other “slow economy/low volatility/safe dividend” plays were all the rage. ETFs like the Utilities Select Sector SPDR Fund (XLU, Rated “B”) and the VanEck Vectors Junior Gold Miners ETF (GDXJ, Rated “C”) outperformed nicely through early July.

But then it was like someone flipped a switch. Those stocks began to lag, while other higher growth/higher inflation sectors like financials, basic materials, industrials, and technology took the lead. That shift really accelerated after Donald Trump was elected in November.

If you stayed with the old guard, rather than rotate into the new leaders, your portfolio would’ve been worse for the wear. So my advice in 2017 is to go with the new flow of funds. Start shifting some money out of growth and into value, as well as out of high-octane tech and into energy, financials, and industrials.

To help you out, I created a Value ETF Screener at the Weiss Ratings website. It lists all the ETFs focused on U.S. small-cap, mid-cap, and large-cap value stocks. I eliminated those with a negative year-to-date return, or a Weiss Rating of SELL (“D+” or lower). A total of 79 ETFs made the cut, with the top 10 (sorted by YTD return) shown here:

Data Date: 6/14/17

You can see that many of the best-performing ETFs focus on high-dividend stocks. That includes the #1 ETF First Trust Rising Dividend Achievers ETF (RDVY, Rated “C”), the #6 ETF O’Shares FTSE U.S. Quality Dividend ETF (OUSA, Rated “C-”), and the #10 ETF PowerShares Dividend Achievers Portfolio (PFM, Rated “C+”).

That’s no surprise to me. I believe ETFs and stocks that pay above-average, yet RELIABLE, dividends are great investments for the rest of 2017 and beyond. That’s why they’re the entire focus of my just-launched newsletter called High Yield Investing.

You can get your hands on the inaugural issue – and the five recommendations it contains – by clicking here . And definitely keep an eye on this rotation we’re starting to see. It could be a very important one!

Until next time,

Mike