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A Rotten Apple?

Author: David Kotok, Post Date: December 23, 2012

We are scheduled to interview on Bloomberg TV at 9:15 AM, Monday, December 24 with anchor Betty Liu on “In the Loop.” Our discussion will likely include markets and factors like the fiscal cliff and debt limit debates.

“The market has been flat since the election,” said one pundit in a recent interview.  “Really?” I thought.  Not by our data.

The pundit’s case was that the post-election Obama-Boehner uncertainty is the cause.  The pundit added that uncertainty trumped the economy, currency, Fed policy or other factors.  Hmmmm, I thought.  Let’s take a look.

In fact, when examined from Election Day to December 21 close, the S&P 500 Index ETF total return since the election is 0.60%.  The appropriate ETF symbol is SPY.  Okay, that is really flat.  But is it flat because of the alleged uncertainty, or is there another reason for this lackluster number?  Our finding is that it is due to something else, a rotten apple is in the barrel.

Apple is weighted heavily in the S&P index.  In fact, when Apple peaked at around $700 a share, it was significantly larger in market cap than Exxon or IBM or GE.

Here are some comparisons to think about as we refute the pundit.  The S&P MidCap 400 Index ETF (symbol MDY) is up 2.5% since the election, while the S&P 600 SmallCap Index (symbol IJR) is up 2.6% in the same period. Guggenheim’s S&P 500 Pure Value ETF (symbol RPV) is up about 4% in that period.

RevenueShares Large Cap ETF (symbol RWL) is up 1.4%.  This ETF is weighted by revenue and not by market cap.  It contains a similar composition of stocks as SPY, but the weighting in the ETF is different.  Apple is weighted less heavily in RWL than in SPY.

RSP is the symbol for the Guggenheim Equal Weight 500 ETF.  Same stocks as in the cap weighted index, but the distribution is close to equal.  Apple is only a small influence on the performance of this ETF.  Since the election, RSP is up 2.1%.

Our conclusion is that the bull market remains intact since the election.  Most stocks are rising in price and are discounting other and positive factors, not just the negative of uncertainty from politics.  Looking at the benchmark SPY offers a distorted view because of the heavier weight of Apple.  Maybe the pundit needs to eat some applesauce.

Disclosure: Cumberland’s US ETF managed accounts presently hold RSP, RPV and RWL.  We do not hold SPY at the present time.

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