Since the end of June, the market internals, the number of new highs and new lows of individual stocks, have come under pressure. The U.S. is not alone as we are seeing the same action abroad as well.   It started with the “Greek Tragedy”, continued when Chinese stocks crashed, and now we are seeing a little “piling on” this week with the devaluation of the Chinese yuan versus the U.S. dollar. In addition, company earnings have been declining due to the slow pace of economic growth and the impact of a strong dollar on overseas sales.

If one just looks at the Dow Jones Index (which is negative YTD and tracks 30 companies) or the S&P 500 Index (up 1.4% YTD and obviously is comprised of only 500 stocks), the price action for the broader market is masked as just a few large companies have been holding up those indices. A more insightful perspective that reflects the market more accurately is the percentage of stocks selling below their 200 day moving averages (basically down for the year). In the S&P 500 Index, 45% of the companies are now selling below their 200 day moving average. In comparison, when looking at all the stocks on the New York Stock Exchange (NYSE) and the NASDAQ (which exceeds 6500 stocks), both these exchanges currently have over 60% of their stocks now selling below their 200 day moving averages. Large stocks can defy gravity for a while, but not indefinitely.

What does this mean for portfolios?

In just the past few weeks, THOR has reduced our U.S. large company exposure to one of the lowest percentages since our founding.   Can they go higher? Sure, but the risk on the downside is high and there are other parts of the market that are much more attractive than U.S. large-cap companies (i.e., emerging markets, energy, MLPs, etc.). Not only are these other asset classes cheaper, but they tend to not have their earnings negatively impacted when foreign countries devalue their currencies, unlike U.S. large-cap companies. In the case of emerging markets, they actually benefit from a strong U.S. dollar as U.S. consumers are able to buy more goods from these countries.