Comments on: Sector Rotation Plus S&P Responds to Jeremy Siegel

By: Dean Morel

Dean Morel — Thu, 15 Jul 2010 00:05:17 +0000

Good post by CXO Advisory on Sector Rotation
http://www.cxoadvisory.com/economic-indicators/perfect-sector-rotation/

Sector Rotation across the Business Cycle
Jacobsen, Ben, Stangl, Jeffrey and Visaltanachoti, Nuttawat, Sector Rotation across the Business Cycle (December 1, 2009). Available at SSRN: http://ssrn.com/abstract=1572910

By: Darren

Darren — Wed, 21 Oct 2009 11:59:06 +0000

Hi Dean, in that case I agree with you re Siegel. The link to the response letter was no longer active so I was only guessing the content.

Yes, it is crazy that S&P correlation is high with the Dow. Maybe it has a lot to do with benchmarking, and following the index. Also for companies of that size, the market pricing is very efficient.

By a ‘managed index’ do you mean that the constituents is reviewed periodically like the ASX200? I haven’t studied the Dow much, but it would interest how they do this? Surely it’ll have to be on market cap (and low volatility) to make it into the index in the first place, then it seems that rationale would be thrown away in favour of dollar weighting?!

By: Dean Morel

Dean Morel — Wed, 21 Oct 2009 02:38:53 +0000

Hi Darren,
- There was no sarcasm in my response, I think Siegel was wrong. He was saying discount the huge losses of the financials as the market value of them was now so low.
- Pull up a chart of the Dow and the S&P 500 and despite the limitations of both look at how closely they correlate.
- I think the key thing to keep in mind with both is that neither is a simple index. They are managed indices. I focus more on the S&P 500 than the Dow as the S&P 500 and the Russell 2K are more representative of what I invest in.

P.S. the Dow is dollar weighted rather than market value weighted like most indexes. I’ve never quite understood why Dow went for dollar weighted, it seems bizarre, yet it works.

By: Darren

Darren — Tue, 20 Oct 2009 13:10:56 +0000

Hi Dean, I only just came across this.

I don’t understand how the quoted rebuttal of what looks like weighted indexes has any justification. Was there an element of sarcasm in your comment “That is the clearest rebut of Siegel I have read.”? (here I’m presume Siegel is arguing FOR weighted indexes.

Surely if those losses are real ($10bn, I can’t imagine both companies lost this?!) then American Apparel should not be in business any longer if it really is 1300 times the size of Exxon. The shares would be proportionately discounted in relation to the loss, and the index /should/ be proportional discounted also. However with the DJIA of course it is not a weighted index, but thankfully it is just the top 30 companies by market cap. IMO, given these limitations I can’t see how the Dow is representative of the stock universe in any way whatsoever.
Darren