Rebalancing, Preparing for The Big Run

The combined weighting of the largest facets of the market in both the NASDAQ and the $SPY are as follows:

TECH 39%
HEALTH 12%
CONSUMER DISC 13.5%
FINANCIALS 7%

In Stocklabs, the largest sectors by weight are as follows:

Tech: 37%
Health: 12%
Financials: 15%
Consumer Goods/Services: 20%

What that means is those are the areas of the market that move the needle. It might also mean that industrials or basic materials are extremely underweight. I find it interesting to see financials so lowly weighted in the broader indices, but very much a large part of the market cap total inside Stocklabs.

Why is this important?

Because most fund managers attempt to mirror the allocations of the $SPY or the $QQQ and will pile into trades accordingly. I recall a time when Tech was only 15% and Basic Materials was 15%; but things have changed over the past decade or so and now all of the very profitable high EBITDA margin companies are in tech. This specifically means that if you’re bullish and want to outperform you need to be in these areas of the market.

How do you manage it?

Set a rebalancing interval of one month or one quarter or if tax efficient minded one year and move the pieces around to conform with your top down weighting. If you want 15% in financials and they’ve underperformed and been reduced to 10%, you’d add. If your goal is to be 25% tech and they’d gone up and now represent 50%, you’d sell.

For me, I just dialed up my tech holdings and reduced basic materials, which might be a bit premature given the recent run. But ultimately, providing the world doesn’t collapse. high EBITDA companies should continue to outperform and their stock prices rise.