This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

How I'm playing the stock market's sector rotation

Stocks in this article: EZA FB FXI GM MORL MORT NFLX P RSX TUR

By Charles Sizemore

With one quarter down, 2014 is getting off to a slow start with the S&P 500 Index (SPX) up 1.3%. But under the surface, we appear to have the beginnings of a major rotation underway.

The momentum stocks that led the market throughout 2013 and the first two months of 2014—social media and new technology stocks such as Facebook (FB), Twitter (TWTR), Pandora (P), Netflix (NFLX) and Tesla Motors (TSLA)—all suffered major corrections in March.

But investors are not simply shunning risk and running to defensive sectors. Emerging market equities endured a horrendous start to the year marked by a mini-currency crisis in Argentina and Venezuela, corruption scandals in South Africa and Turkey, a feared China "Lehman moment" and the Russian annexation of Crimea. Now, this sector has been quietly been enjoying a rally.

Investors appear to be returning to the sector after dumping it en masse in the first six weeks of the year.

I believe this is a trend that we can expect to see continue over the next 2-3 quarters. In 2013, investors came to view the U.S. as the "cleanest dirty shirt" among world markets. But even within the U.S. market, real growth was limited to a small number of new technology sectors. This had the effect of funneling investors into a handful of sexy "story stocks," which sent the valuations of these momentum darlings well into bubble territory.

There is nothing inherently wrong with an aggressive momentum strategy, of course, and there is nothing wrong with trading a stock that you know to be vastly overpriced relative to its underlying fundamentals so long as you understand the risks.

If this is your style of trading, you have to have risk management in place and you have to have an exit strategy. The absolute worst thing you can do is "drink the Kool Aid" and convince yourself to believe the impossible—such as the notion that Tesla (TSLA), a company that sells as many cars in a year as General Motors (GM) in a weekend, deserves a market cap that makes it over half the size of General Motors.

Over a short trading time horizon, valuations don't matter. The market is driven by sentiment and money flows. But over a longer time horizon, valuations most certainly do. In the immortal words of Warren Buffett, over the short-term the stock market is a voting machine. Over the long-term, it is a weighing machine.

Bringing us back to emerging markets, this is where the real value is today. Based on trailing earnings and book value, emerging markets as a group are undervalued by 20%-25% relative to their own histories of the past 18 years.

But more significantly, the discount in valuation between emerging markets and developed markets is just a hair below the crisis levels of 2008-2009—and not far from the levels seen during the last emerging-market crisis in 1998.

Has the "weighing machine" finally detected the value in emerging markets?

It's starting to look that way. Regardless, I have been averaging into multiple emerging market positions in my Tactical ETF Portfolio.

In March I initiated or added to positions in the MarketVectors Russia ETF (RSX), the iShares MSCI Turkey ETF (TUR), the iShares MSCI South Africa ETF (EZA). Additionally, I have existing positions in the iShares China Large Cap ETF (FXI) and the DB X-Trackers Harvest China ETF (ASHR).

Separately, I continue to add to my position in mortgage REITs via the Etracs Monthly Pay 2X Leveraged Mortgage REIT ETN (MORL) in my Tactical ETF portfolio and via the Market Vectors Mortgage REIT Income ETF (MORT) in my Dividend Growth portfolio and Sizemore Global Macro portfolio.

Bond yields have stayed within the bands I expected (2.2%-3.2% on the 10-year Treasury), and I expect to see a basket of mortgage REITs outperform the S&P 500 on a total return basis in 2014.

My overall strategy for 2014 remains unchanged:

1. Overweight emerging markets

2. Overweight developed Europe

3. Within the U.S. market, overweight dividend-paying stocks and income-focused investments.

DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Charles Sizemore

Charles Sizemore

Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs