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Portfolio Update

Portfolio Update

The Dividend Growth Portfolio is officially 1-month-old today, a month that may seem inauspicious given the collapse in the bank and real estate stocks - staples of yield-hungry investors.

But that backdrop, along with the initial overall general market weakness, did provide a good backdrop to demonstrate the importance of having a disciplined approach.

Let me begin with a general review of the market.

The first quarter of 2023 is in the books and finished on a high note in March.

The S&P 500 was up for the month and for the quarter but is being outpaced by the Nasdaq 100.

YTD, the S&P 500 is up 7.46% vs. 20.71% for the Nasdaq 100.

Across the entire S&P 500 universe, the average stock was up roughly 3% in Q1. That's less than half the 7% that the S&P gained at the index level, which means that the largest stocks in the index gained more than the smallest stocks.

It was also a quarter where growth (ie., high P/E, high P/S) did significantly better than value.

This latter point is of importance to dividend investors as many of the companies commonly sought after for dividend yield are also classified as value stocks.

This graph shows the disparity in performance on a YTD basis.

The purple bar is iShares Select Dividend (DVY) ETF and the light blue is the Russell 100o Value (IWD) ETF.

In many ways, Q1 was more liquidity driven as opposed to fundamentally driven as the Fed added $300B to its balance sheet in reaction to the banking crisis.

Mean reversion was heavy at play with 2022 biggest losers up the most so far YTD.

Overall, market breadth was awful as only a small handful of stocks drove the S&P return in Q1.

But, there are some signs of improvement, which is why I have recently begun adding some new names to the portfolio.

To start with, my Bullish Percent Market Timing Indicator has recently just flipped from negative to positive. This indicates that institutional money is flowing into the market as more stocks are displaying buying demand.

Historically, this indicator has done an excellent job of catching market turns. It signaled a sell signal in mid-February, after which the S&P 500 fell by over 300 points.  

There are other signs too.

The 50-day moving average is widely watched by investors and is considered an important support level for individual stocks. As this chart shows, recently, only 17% of the stocks within the S&P 500 were actually above their 50dma, indicating an extremely weak market.

But as can be seen, that number is now on the rise, and the move back up above 30% can be viewed constructively. It would take back above 50% to solidify the trend, but this is a step in the right direction and market pivots often occur below 30%.

Another indicator that has historically demonstrated good success at catching market turns is the Nasdaq McClellan Summation Index. This indicator measures internal market breadth, and that too has just given a positive signal.

Finally, the Value Line Arithmetic Index did close the week above its 30-week moving average, and this too is a positive.

April is historically one of the strongest months in terms of market seasonality, and it appears that the market is almost acting on cue by turning bullish at this particular time.

Sector Analysis

Technology, Communications, and Industrials are the current sector leaders with Financial and Real Estate the laggards.

Another sign of demand returning to the market is visible in the Sector Bell Curve which expands the sector analysis into 45 distinct sub-sectors.

At the beginning of this past week, only 2 sectors were blue, indicating extremely limited demand at that time.

The picture today is much different.

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