Seeing stocks drop more than 50% from record highs not once but twice in the span of ten years is enough to bruise bludgeon the psyche of even the best investors.  Even more than a decade after the lows of the credit crisis and the S&P 500 trading at double the level it traded at when it peaked in 2007, investors still look at equities with suspicion.  The latest example that illustrates this is the TD Ameritrade Investor Movement Index (IMX).  According to TD Ameritrade, the IMX index is meant to provide a snapshot of sentiment on the part of retail investors by tracking the behavior and trading activity of the firm’s clients.

With the market at record highs, one would have expected sentiment on the part of retail investors to be pretty positive resulting in an elevated reading in the IMX index.  The reality is – you guessed it – the opposite.  The chart below compares the IMX index to the S&P 500 going back to 2010.  From 2010 through 2016, the IMX index oscillated in a range of roughly four to six even as the S&P 500 made new all-time highs.  It wasn’t until 2017 when the broader market traded higher all year with nothing more than a 3% pullback that the IMX index really started to break out of its range.  After the GOP tax plan passed through Congress and was signed into law, the IMX index surged above eight to record highs.  Investors were finally starting to embrace the market again, as individuals who had sworn off equities forever finally started to want back into the stock market.  Some even dipped their toes into bitcoin and other crypto-currencies!

The fun didn’t last long, though.  In late January 2018, the S&P 500 had its first 10% correction in more than a year, and investors weren’t willing to wait it out.  They quickly headed for the exits and have once again mostly stayed on the sideline.  This past November, even though the S&P 500 was at record highs, the IMX index was at a reading of just 5.17, which is just barely above its historical average of 5.16.  Not exactly a level you would consider indicative of confidence.  Sign up using our 2020 Annual Outlook Special to gain access to our full report between now and year-end which covers the market from just about every angle imaginable!

If you have been keeping track of our Daily Sector Snapshot sent out with the Morning Lineup and the Closer each day, you may have noticed that the Financial sector has been cheap relative to not only the other sectors, but also to its historical range. Financials have both the lowest P/E (14.21) and lowest price to book (1.49) of any sector, and its P/E is just in the 44th percentile of the past ten year’s range.  Technology, for comparison, is in the 99th percentile and Utilities is in the 96th, meaning they’re very overvalued relative to recent historical levels.

Unum Group (UNM) is a Financial sector stock with one of the lowest valuations. UNM is the smallest (by market cap) company out of the S&P 500’s stocks in the Insurance industry group, but it also has one of the lowest price-to-book, price-to-sales, and price-to-earnings ratios. Adding to the stock’s attractiveness is a 3.81% dividend yield; the third-highest in the industry. With a dividend payout ratio of just 24.55% and a history of consistent growth over the past decade, the company appears capable of continuing to grow the payout without worry.

Part of the low valuation and low market cap is a result of the stock having nearly been cut in half over the past two years since the January 2018 high of $58.59.  But more recently, the downtrend from that prior high appears to have ended.  Since the Fall, UNM has been trading in a steady uptrend with a series of higher lows and lower highs.  In early November, the stock broke out of its multiyear downtrend before successfully retesting this line twice in the past month.  In the past few days, the stock has begun to move higher once again off of this retest.  If you’re looking for a yield play with a chart pattern that looks to be turning higher, UNM might be worth some further analysis.  Start a two-week free trial to Bespoke Institutional to access our Morning Lineup, Closer, Sector Snapshot, and much more.

While ETFs tend to mirror the performance of the underlying index or asset they are meant to track, leveraged ETFs seek to provide investors and traders the opportunity to experience performance that is a multiple (usually double or triple) of the underlying asset’s performance. For individual investors, though, these types of securities should be approached with extreme caution due to higher costs and excess risks involved.  The longer an investor holds these securities, the greater there is a chance for the ETF’s performance to deviate from the performance of the underlying asset.  They’re only meant to actually double or triple the underlying security’s performance on a daily basis.

Leveraged ETFs tend to do best in tracking their underlying asset during trending markets as opposed to choppy periods, and with 2019 being a year where the market has, for the most part, traded steadily higher, these leveraged ETFs have performed very well and in many cases lived up to their descriptions.  Equities have already performed well this year with the S&P 500 (SPY) having rallied over 27% year-to-date as of yesterday’s close, and that is off of the November 27th highs just a hair under 28%. The UltraPro S&P 500 ETF (UPRO), which is a 3x leveraged ETF, has actually risen 85.6%, which is more than three times the performance of the S&P 500.

Similarly, the 3x leveraged ETF tracking the Nasdaq 100 – UltraPro QQQ (TQQQ) – has more than doubled so far in 2019!  That is also slightly more than three times the performance of the Nasdaq 100 ETF (QQQ).

Small caps, which have lagged their large-cap peers and trended down or sideways for most of the year, are still up 22.6% as measured by the Russell 2000 ETF (IWM).  Given the more sideways nature of the underlying index this year, the 2x Ultra Russell 2000 ETF (UWM), which is supposed to double the daily return of the Russell 2000, has come up modestly short of its described goal, gaining 42%.   Looking at the chart below, you can see that during periods where the Russell 2000 was trending higher, the index surged, but during periods of sideways trading, it actually declined.

In the Treasuries space, the 2x 20+ Year Treasury ETF has also pretty much doubled the return of the underlying ETF it tracks at 29% vs 15.9%.

In the commodities space, USO, which is meant to track the price of oil, has risen just under 28%, but the 2x Crude ETF – Ultra Bloomberg Crude Oil (UCO) – which seeks to provide double the daily return of WTI futures – has only returned 1.5 times the return of USO and only 1.4 times the return of the underlying index it is meant to track.  Again, UCO and other leveraged products are designed for shorter holding periods (one day in UCO’s case), so factors such as compounding can lead to long-run returns varying from the underlying index.

Additionally, while levered ETFs really juice upside returns on the way up, the opposite also holds true.  An investment in the natural gas ETF (UNG) at the start of the year would have been a notable pain trade with a 30% decline YTD.  With losses like that, it has been an absolutely brutal year for the triple-levered long natural gas ETF (UGAZ).  The only silver lining, if you can call it that, is that while the ETF ‘should’ be down 90%, it’s down ‘only’ 79.6%.  Start a two-week free trial to Bespoke Institutional to access our interactive Chart Scanner and Trend Analyzer tracking these ETFs and much more.