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Year-to-Date Heat Map and Outlook

This week’s Weekly reviews what has been working and what has NOT been working year-to-date. Specifically, we look at the best and worst by sector, style and the stocks of the Dow Jones. We believe there is a tendency for mean reversion in the market whereby what has been working best, may not deliver the best returns going forward. And what has NOT been working, may work better in the future. For example, small cap value, real estate and several of the worst performing stocks in the Dow may be poised for outperformance going forward.

With regards to small cap value stocks (see table below), we almost always prefer this category over the long-term. And after years of UNDER-performance due to the feds “pro-growth” monetary policies, we believe small value stocks are likely resume the trend-bucking they started this year. Further small cap value stocks have pulled back this quarter and this month thereby making for a more attractive entry point in our view. We continue to own Small Cap Value ETF (IWN) across all three of our Blue Harbinger strategies (Disciplined Growth, Income Equity, and Smart Beta), and we expect resumed outperformance for this category going forward. Plus the ETF we are using (IWN) is very low cost and well diversified.

And with regards to Dow Jones stocks, we actually own two of the worst three performers so far this year in our Disciplined Growth strategy, yet the strategy continues to outperform the market significantly this year and since its inception in 20012. Specifically, we own Disney and American Express in our Blue Harbinger Disciplined Growth strategy. We believe in both of these companies going forward, and we also believe in the mean reversion concept we mentioned earlier whereby the worst performers last year often turn into some of the best performers in the following year.

And with regards to real estate, as measured by the Real Estate ETF (XLRE) it had been performing great this year up until recently. What the graphic we have provided does NOT adequately show is just how far the bigger dividend real estate investments (many REITs) have fallen since outperforming very significantly so during the first eight month of this year. We like selective stocks in this category following the recent pullback. For example, we like this week’s members-only investment idea: EastGroup Properties (EGP). You can read our EastGroup write-up here.

For your reference, here is the full heat map:

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