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Chart Advisor

By C. Theodore Hicks II, CFP®, CKA®, CMT®

1/ Key Indices YTD

2/ Since November 1st

3/ Escape Velocity

4/ Emerging Markets vs. Small Cap

5/ Emerging Market Debt vs. Aggregate Bonds

Investopedia is partnering with CMT Association on this newsletter. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.

Key Indices YTD

Courtesy of Optuma

Today’s first chart is the year-to-date relative comparison chart for a handful of key indices. As you can see, the S&P 500 is the clear winner.

However, while it is important to know what has happened, as investors, we are also trying to discern what might reasonably be expected to happen. Here we see that the United States large cap index had the best performance for 2023 - at least out of the ETFs listed.

But do we expect that trend to continue?

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Since November 1st

Courtesy of Optuma

Chart 2 is examining the same ETFs, but since November 1st.

We know that the stock markets entered a correction towards the end of July. August, September and October were pretty negative months. However, that correction ended on about the first of November. So, what has happened since this new rally began?

Chart 2 shows us that small-caps are the clear winner over this two month time span. The fact that small-caps are leading is one of the many signs we see that gives us a little more confidence that we are finally in a healthy bull market. (We have previously discussed why the majority of 2023 was not a bull market, despite what The Magnificent 7 were doing. You can watch the November Monthly Market Monologue video on our YouTube channel to see what we were saying at the time. While there, feel free to subscribe to the channel as next week we will produce our January Monthly Market Monologue. You can find the channel here.)

Escape Velocity

Courtesy of Optuma

Chart 3 is taking a closer look at small-cap US equities. While I believe I’ve written about small-caps at least one other time during my stint as author of this newsletter, it is worthy of a review as I suspect many readers may be planning to adjust their 401(k)s or other retirement accounts as the year begins. So, should you increase your allocation to small-caps?

Obviously, without knowing you or your situation I cannot answer that question for you.

However, let’s look at the chart and see what it tells us. We will then use this same concept to review a couple of other sectors.

On chart 3, you will see that I have added a light blue / gray rectangle to reflect the trading range that has plagued small-cap equities for two years. Note the velocity of the move they have experienced since November 1st. Since small-caps finally escaped this trading range, we will call this escape velocity. Small-caps finally gained enough momentum to break free of this trading range’s gravitational pull.

By itself, this is encouraging. But when we refer back to Chart 2 and add the two data points together, we can see that small caps could indeed continue to lead.

Emerging Markets vs. Small Cap

Courtesy of Optuma

On the left, I am showing an Emerging Markets ETF. On the right, the same small-cap US equity ETF. If we expect small-cap companies to outperform in the weeks or months ahead, can we expect the smaller countries to do likewise?

These types of questions are what we need to be considering when we think about how to allocate a 401(k) or an IRA. If we can reasonably expect - for we cannot know for sure - smaller countries (emerging markets) to outperform, we want to include some exposure in our investment accounts.

Unfortunately, so far, it appears that the emerging market ETF has not yet gained escape velocity. This ETF, VWO, is still in the two year trading range. As a result, I do not yet have the confidence that this sector will help me reach my out-performance goal. As a result, I would likely exclude this sector for the time being.

However, the same cannot be said for emerging market debt.

Emerging Market Debt vs. Aggregate Bonds

Courtesy of Optuma

On the left, we have an emerging market debt ETF, PCY. On the right, we have the iShares US Aggregate bond ETF, AGG. Note which is still in the trading range, and which has escaped it.

It was my pleasure writing for you these last two weeks. Feel free to follow me on LinkedIn and Twitter. Yes. I still call it Twitter. You can find my profile in the bio below.

From my entire team at Hicks & Associates Wealth Management, and on behalf of the CMT Association, I wish you all a very blessed New Year.

About This Week's Author

Theodore Hicks, CMT is the Founder and Chief Investment Officer for Hicks & Associates Wealth Management, an SEC Registered Investment Adviser. Hicks and his team manage money for families and retail clients using a proprietary, multi-strategy investment process through a rules-based framework. Since most of their clients are either near or already in retirement, the process is designed to minimize downside risk. Hicks frequently posts charts and his thoughts to his LinkedIn and Twitter accounts.

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