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The Rules Rule! Sam Stovall

May 28, 2019

Sector Rotation Strategies

Fear & Greed: Living With Volatility We Acknowledge its Existence

Typically Increases as Bull Markets Age

Usually Indicates That the “End is Near”

We Try to Neutralize It Through Sector Rotation

Correlation

Seasonality

Momentum

We Should Try to Benefit From It

Usually Better to Buy than Bail

2

Today, Volatility is Not High!

3

Rolling 12-Month Count of Daily Closing Price Changes of 1%+

Source: CFRA, Yahoo Finance. Data as of 5/14/19.

-

20

40

60

80

100

120

140

160

180

AverageSince 2000:

70||

Now46

AverageSince 1950:

70|||||

Typically Signals the END of a Decline

4

Rolling 21 Day Average Daily High-Low % Change in the S&P 500

Source: CFRA, Yahoo Finance. Data as of 5/14/19.

-1%

0%

1%

2%

3%

4%

5%

6%

7%

10/8/988/14/02

11/14/08

9/14/116/15/10

2/16/16 12/31/18

+2 Std. Dev.

-2 Std. Dev.

+1 Std. Dev.

-1 Std. Dev.

Sage Advice

5

“A man’s got to know his limitations.”

-- Dirty Harry,

Magnum Force

Your Portfolio’s Worst Enemy May Be You!

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Many Investors are:

Indecisive

Impatient

Emotional

The Seven Rules of Wall Street

Let Your Winners Ride, But Cut Your Losers Short

As Goes January, So Goes the Year

Sell in May, Then Go Away

No Free Lunch on Wall Street (Oh Yeah, Who Says?)

Don’t Get Mad -- Get Even!

Don’t Fight the Fed (At Least for Too Long)

There’s Always a Bull Market Someplace

7

Safety Net: Avoiding Another 2008

Correlation – Static

Seasonality – Semi-Annual

Momentum – Monthly

8

Free Lunch Portfolio

9

Hypothetical S&P 500, Sector & Portfolio Price Returns and Volatility

Source: CFRA, S&P Global. Past performance is no guarantee of future results. Data: 12/31/1990-12/31/18.

11.6% 9.6% 11.9%

29.9%

17.1% 18.2%

0.39

0.56

0.65

0%

10%

20%

30%

40%

50%

60%

70%

S&P 500 Info. TechnologySector

S&P 500 Index Portfolio: 50% Cons.Staples, 50% Technology

Compound Annual Growth RateStandard DeviationReturn/Risk Ratio

Free Lunch Portfolio by Size & Region

10

Hypothetical Benchmark, Sector & Portfolio Price Returns and Volatility

Source: CFRA, S&P Global. Past performance is no guarantee of future results. Data: 12/31/1994-12/31/18.

7.3%

9.3%

10.0%

6.0%

9.8%

11.4% 11.5%

9.5%

5%

6%

7%

8%

9%

10%

11%

12%

S&P 500 S&P EW 500 S&P SC 600 Global 1200

100% Benchmark Index 50% Consumer Staples and 50% Info. Technology

Safety Net: Avoiding Another 2008

Correlation – Static

Seasonality – Semi-Annual

Momentum – Monthly

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12

Average S&P 500 Six-Month Price Changes Since WWII

Six-Month Ebbs and Flows

Source: S&P Global Markets Intelligence. Data: 12/31/1945-4/30/2019. Past performance is no guarantee of future results.

4.0% 3.9% 4.0%

2.2%1.4%

2.5%

4.1% 4.2% 4.4%

6.4% 6.6%

5.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Seasonal Sector Rotation

13 Source: CFRA, S&P Global Markets Intelligence. Past performance is no guarantee of future results. Data: 4/30/90-4/30/2019.

Leveraging “Sell in May” and the “The Cyclical Six” Since 1990

1.8%

6.9%

4.6%

9.4%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

May-Oct. (Cons. Staples & HealthCare)

Nov-April (Cons. Discretionary,Industrials, IT & Materials)

S&P 500

Seasonal Rotation Strategy

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The CFRA-Stovall Seasonal Rotation Custom Indices

Higher Returns, Lower Volatility

Since Beat StandardIndices MTD YTD 2018 4/1990 Benchmark DeviationS&P 500 3.9 17.5 (6.2) 7.8 NA 16.6

Seasonal Rotation Large Cap. 4.9 20.8 0.6 13.7 72% 15.7

S&P Equal Weight 500* 3.6 19.0 (7.6) 11.6 NA 17.8Seasonal Rotation Equal Weight* 4.3 21.6 (2.4) 17.7 76% 16.1S&P SmallCap 600** 3.8 15.4 (9.8) 9.9 NA 16.2

Seasonal Rotation SmallCap** 4.7 19.5 (2.9) 13.8 67% 15.6

S&P Global 1200** 3.4 15.4 (10.5) 5.8 NA 14.8

Seasonal Rotation Global** 4.5 18.6 (3.5) 11.5 67% 13.9Source: S&P DJ Indices. Returns: 4/30/1990-4/30/2019. *Total Return. Others are price changes.**Since 4/30/1995. Past performance is no guarantee of future results. https://customindices.spindices.com/?custom_client_name=cfra Also visit: Paceretfs.com

% Returns2019

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The CFRA-Stovall Seasonal Rotation Custom Indices Oct. 2018-Apr. 2019

Higher Returns, Lower Volatility

Source: CFRA, S&P Global Markets Intelligence. Data: 10/31/2018-4/30/2019. *Total return.

8.6%

10.4%

2.6%

7.9%

12.4%13.7%

6.2%

10.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

S&P 500 S&P EW 500* S&P SC 600 S&P Global 1200

S&P Benchmark

CFRA-Stovall Seasonal RotationCustom Index

Safety Net: Avoiding Another 2008

Correlation – Static

Seasonality – Semi-Annual

Momentum – Monthly

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Sector Rotation Using Relative Strength

17

Over/Underweight Sectors Based on Trailing 12-Month Price Returns

Source: CFRA, S&P Global Market Intelligence. SD: Standard Deviation. FO: Frequency of Outperformance. Data as of 12/31/1990-12/31/2018.

S&P 500Sectors CAGR SD CAGR SD F.O.Top 3 7.5 17.0 9.9 17.7 68%

Bot 3 7.5 17.0 4.6 17.0 32%

S&P 500 Portfolio

Stick With Strength

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Sector & Sub-Industry 12-Month Momentum Versus the S&P 500 (CAGRs)

Source: CFRA, S&P Global Market Intelligence. Past performance is no guarantee of future results. Data: 12/31/1990-12/31/2018.

7.5%

9.9%

12.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

S&P 500 Top 3 Sectors Top 10 Sub-Industries

Stick With Strength

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High Momentum Groups Based on 12-Month Price Changes as of 4/30/19

Source: CFRA, S&P Global Market Intelligence. Past performance is no guarantee of future results.

Top 3 SectorsCons. Discretionary

Real EstateTech

Top 10 Sub-IndustriesApplication Software

Automotive RetailCable & Satellite

Consumer ElectronicsData Processing & Outsourced Services

Household ProductsInd. Power Producers & Energy Traders

Metal & Glass ContainersRailroads

Systems Software

Sub-Industry RS Rankings

20 Source: CFRA, S&P Global Market Intelligence. Data: 12/31/1995-12/31/2019.

Higher Scores Tend to Deliver Higher Returns

Rel. Strength Rel. StrengthRanking (RSR) CAGR F. O. Ranking (RSR) CAGR % F. O.

5 (Top 10%) 11.9 57%

4 (Next 20%) 9.6 70% Buy (4 & 5) 10.5 70%

3 (Middle 40%) 7.0 57%

2 (Next 20%) 5.8 43% Sell (2 & 1) 5.8 39%

1 (Bottom 10%) 5.4 48%

S&P 1500 6.6 NA

Annual

Free S&P Sector Scorecard

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Weekly S&P 500 Scorecard

Source: S&P Dow Jones Indices. As of 5/14/19.

Free S&P Sector Scorecard

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Weekly S&P 500 Scorecard 12-Mo.

Index % of 500 % Chg.Value or Sector 1 Wk. 13 Wks. YTD 2018 5-Yr CAGR Beta Std. Dev. Rank

S&P 500 2,881.40 100.00 (2.2) 6.4 14.9 (6.2) 8.4 1.0 11.2 NMGrowth 1,760.79 53.32 (2.0) 8.0 16.5 (1.4) 11.2 1.0 11.9 NMValue 1,132.26 46.68 (2.4) 4.6 13.3 (11.3) 5.2 1.0 11.3 NMPure Growth 11,765.39 15.54 (1.5) 7.0 17.5 (4.9) 9.4 1.1 12.7 NMPure Value 6,481.96 9.84 (2.1) 3.3 13.5 (14.2) 4.0 1.1 14.2 NM

Communication Services 164.33 10.37 (1.9) 8.3 18.4 (16.4) 0.5 0.7 15.0 4 Advertising 334.13 1.07 (0.4) 5.8 9.7 1.1 2.8 0.8 17.9 54 Alternative Carriers 62.74 0.42 (6.8) (23.4) (28.1) (9.2) NA NA NA 123 Broadcasting 562.05 2.05 (0.2) (4.6) 10.3 (12.9) (3.7) 1.3 23.8 53 Cable & Satellite 443.95 10.75 (0.2) 13.4 28.5 (16.3) 11.6 1.1 19.4 2 Integrated Telecom Services 159.31 18.32 (0.4) 4.6 4.1 (11.9) (0.9) 0.5 14.4 58 Interactive Home Entertainment 347.37 3.03 (0.3) 2.2 5.9 (21.5) 24.0 1.0 29.2 119 Interactive Media & Services 105.84 47.95 (2.7) 8.8 22.6 NA NA NA NA NAMovies & Entertainment 492.42 16.18 (2.6) 12.8 25.6 (0.8) 6.9 1.1 18.2 8 Publishing & Printing 261.90 0.24 (3.5) (4.6) 4.7 (30.1) (3.2) 1.4 26.0 114

5-YearPrice Changes (%)

Source: CFRA, S&P Dow Jones Indices. As of 5/10/19.

Using History as Virtual Valium

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Investors are Typically Better Off Buying Than Bailing

Source: CFRA, S&P Global Market Intelligence. Past performance is no guarantee of future results. Data: 12/31/1945-4/23/19.

Months toType (% Decline) Count % Chg. Months Recovery

Pullbacks (5.0%-9.9%) 56 (7) 1 2

Corrections (10.0%-19.9%) 23 (14) 4 4

All Bears (20%+) 12 (33) 14 25

>"Garden Variety" (20%-40%) 9 (26) 11 14

>"Mega-Meltdown" (40%+) 3 (51) 23 58

Peak-to-Trough Declines

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