Tuesday, January 3, 2012

Forward Looking

Now that the holidays are over, what is going on in the markets? A couple of European debt auctions went fairly well last week. This does not change the overall long-term picture, but looks like nothing collapsed over the holidays. Moreover, the Iran-Strait of Hormuz situation could have spun out of control early on, but it did not (yet).

I was curious what news items were affecting the companies on my equity watch lists (both long and short). On the growth side of things, the basic materials and energy side lead the market (APA, EOG, ROSE, APC, HAL, NE, MOS, FCX). FCX is up ~6%. The rest are up more than 2% for the most part. HAL is suffering from some headline shock due to its spate with BP (BP is asking HAL to foot the cleanup bill plus lost profits), but the damage is mild since nothing is decided yet.

The S&P 500 index is a market cap-weighted index (as opposed to equal-weighting (Rydex) and price-weighting (Dow)). Starting out the new year, I was curious as to how far off is one of my watch lists versus market sector weightings.

Unsurprisingly, my growth picks did not result in a balanced portfolio. It turns out that I am vastly overweight in energy (30%) in terms of frequency. S&P 500 only gives a 12% weighting to energy, but this is in terms of market cap weighting.

When I plot the market cap weights of my growth picks, the picture becomes even more skewed, though skewed in a different way from the frequency case. Now tech turns out to be the vastly overweight sector. Though I had more energy picks than other sectors, those energy names I selected were small- to mid-cap ones whereas my tech picks were mostly large- or mega-caps. This is interesting to me because although I tried to be balanced in terms of sector weightings when I initially constructed the watch list, I did not actively consider the market caps of my picks. In order to achieve a "balanced" portfolio, one has to consider the market cap of the constituents, especially when a portfolio is market cap-weighted in terms of allocations. Fortunately for me, my actual holdings look nothing like this watch list.

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