Stocks Rebound During October; Strongest Gains ConcentratedStocks bounced back strongly during October, with the S&P 500 posting its best monthly gain since October of 2011. It is worth noting that large-cap indexes outperformed the small-cap benchmarks for the month and continue to outperform smaller companies year-to-date. The S&P 500 index, as measured by the Vanguard 500 Index fund (VFINX), was up 8.4% during October and raised its year-to-date performance back into the black—up 2.6% through October 31, 2015. The Vanguard Small Cap Index fund (NAESX) posted a strong 5.7% gain during October but remains in the red year-to-date, with a total return loss of 1.4%.
Even among the large-cap stocks, the strongest gains are concentrated among the largest stocks. The S&P 500 index is weighted by market cap, so the largest stocks are the ones that have the greatest representation in the index and, therefore, have the greatest impact on the index’s performance. In contrast, the Guggenheim S&P 500 Equal Weight ETF (RSP) invests in the same stocks as the S&P 500 index, but with equal weighting. The performance differences this year are startling. The Guggenheim S&P 500 Equal Weight fund was up 7.2% during October, but remains down 0.5% year-to-date. It has generally fallen less during down months this year, but has not snapped back as sharply as the market-cap-weighted S&P 500.
For now, the largest and most popular stocks are driving the market. This may have no significance, but it is generally preferred that the broad market participate in market uptrends. Investors look at a number of market breadth indicators to get a feel for how widely the full range of stocks are participating in the movement of the market. We have a number of articles on AAII.com that cover the topic, including Gauging Market Direction With Market Breadth Data by Wayne Thorp, CFA.
The Model Fund Portfolio was up 6.9% in October, while the Model Shadow Stock Portfolio, which invests in micro-cap value stocks, was up 1.7%.
The Model Shadow Stock portfolio had 17 out of 30 stocks up for the month. Flexsteel Industries (FLXS) posted the strongest gain for the month, up 39.7% after reporting stronger-than-expected earnings during October. Other stocks with double-digit gains during October included Ennis Business Forms (EBF), Global Power Equipment (GLPW), Marlin Business Services (MRLN), PC Connection (PCCC) and TravelCenters of America (TA).
Year-to-date the Model Shadow Stock Portfolio has declined 14.0%, while the Vanguard Small Cap Index fund is down 1.4% and the DFA U.S. Micro Cap Index fund (DFSCX) is down 1.4%. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 15.6%, while the Vanguard 500 Index fund has gained 9.1%.
The Model Fund Portfolio’s 6.9% gain in October compares to an 8.4% increase for the Vanguard S&P 500 Index fund. Since its inception in June of 2003, the Model Fund Portfolio has a compound annual average return of 8.4%, just behind the 8.5% return of the Vanguard S&P 500 Index fund over the same time period.
There are no changes to the Model Shadow Stock Portfolio this month. The portfolio underwent its quarterly review at the beginning of September and no stocks met the sell criteria. Because this is an actual and fully invested portfolio, no new stocks are added without the removal of a current holding.
Forty stocks passed the screen at the end of October. Seven stocks in the portfolio qualified for purchase at the end of October, up from five at the end of September: CSS Industries (CSS) and Key Tronic Corp (KTCC) now pass the initial Shadow Stock Screening criteria, in addition to the passing stocks from the prior month: Ducommun Inc. (DCO), Rocky Brands (RCKY), Salem Media Group (SALM), Ultra Clean Holdings (UCTT) and Vishay Precision Group (VPG). Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)
The next quarterly review of the Shadow Stock portfolio will take place in December.
Click here to see the current purchase and sell rules. The size and value rules are subject to revision depending on prevailing market conditions.
There were no changes to the Model Fund Portfolio this month. The Model Fund Portfolio was discussed in the November 2015 AAII Journal. The next quarterly review of the portfolio will take place in February 2016.