Do This One Thing if You Want to Beat the S&P 500

Strength is Relative

You might be asking yourself, what exactly does that mean? In the world of stocks it means that If you’re going to by a sector or anything outside the S&P500 – and I consider the S&P500 your free rate of return (the one index everyone on the planet is trying to beat) – then you need to do something very specific to make sure you are beating the S&P500 and growing your money.

Let’s take a look at three examples. Each example below is a sector that we compare to the S&P500.

1. Financials vs. S&P 500

Look at the chart below. The chart compares the financial sector with the S&P 500. It has 3.5 years of data. The blue line is the 70 day exponential average. When I see this it’s clear that from about August 2013, financials are under-performing the S&P 500. This means you don’t want to be in this sector because it will grow your money slower than if you just bought the  S&P 500. Because this is a relative chart it means that if you see the lines up and to the right the financial sector is outperforming the S&P 500. And if the lines are going down and to the right, then financials are under-performing the S&P 500. So if you buy a sector, you want to buy one that is outperforming the S&P 500.

2. Energy vs. S&P 500

Look at the energy sector compared with the S&P 500. You can clearly see the lines moving down and to the right. This means that energy is under-performing compared with the S&P 500. I get that people might want to get into this sector hoping that it will go higher, but look, it’s impossible to predict when it will. It could have bottomed anywhere over the past year and a half and I’m sure some thought it had bottomed in March of 2015. But it didn’t. This is a clear signal that the energy sector is greatly under-performing the S&P 500.

3. Discretionary vs. S&P 500

Look at this next chart comparing the discretionary sector with the S&P 500. You can visually tell that this sector is outperforming the S&P 500. If you want to buy something other than the S&P 500, you need to make sure that it is outperforming the S&P 500. Because if it’s not – you’re putting your money into an investment that is actually growing your money slower than it could grow if you just bought the S&P 500.

So How Do You Do This?

This is pretty easy stuff to figure out. All you need to do is go to a website like StockCharts and just type in the sector symbol followed by the S&P 500. For example XLE:SPY. This chart would compare the energy sector to the S&P 500. This is so easy and important. The relative strength of a sector to the S&P 500 is easy to figure out and key if you want to grow your investments faster than the S&P 500.

RCPeck-Dig Signature.JPG

RC Peck, CFP

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