The ETF Portfolio Strategist: 06 OCT 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
The broad trend for global markets continues to reflect bullish sentiment. That may seem strange at a time when the crisis in the Middle East is deepening, a potentially divisive and uncertain US election is just weeks away, and the powder keg of the Ukraine-Russia war continues to lurk. But the collective judgment of the crowd is effectively advising: the trend remains positive.
There was pushback for that messge in the summer, but in recent weeks the markets have resumed an upward bias that’s becoming increasingly strong once more. Using a set of global asset allocation ETFs to track the bias continues to reflect a high degree of bullish strength, as show in the table below. See this summary for details on the metrics in the tables.
Summaring the trends for the funds above in a single indicator (Global Trend Indicator) reminds that while the last couple of months have been rocky, to date the weakness has fallen short of a clear warning sign. Although GTI’s short-term moving averages buckled, the medium- and longer-term counterparts remained relatively firm.
By contrast, compare GTI’s profile in late-2021/early 2022, when clearer signs of a trend breakdown emerged (see chart below). Although there was still room for debate in early 2022 on the outlook for GTI (and globally diversified strategies generally), by May 2022 it was much harder to argue that the recent turbulence was noise. As it turned out, the trend would deteriorate further in the months ahead and bottom in late-September/early October that year before reversing course into a new bull run as 2023 unfolded.
It’s important to point out that GTI’s profile at the moment still skews positive, much more so than in April and May 2022. Yes, this could be a head fake. Note that in spring of 2022 GTI rebounded to a new high, just before it began a downward trend that would cut deeply into portfolio strategies overall that year.
Is it different this time? No one knows, but if the markets are leading us astray there will soon be tell-tale clues via GTI. Among the key issues to monitor in the days and weeks ahead:
Will the current rebound in GTI overtake its previous summer high? We’re close to that point, but not quite there yet.
Will GTI’s 50-day average recover above its 100-day average? If the trend fails to repair this damage soon, the case for remaining cautious will continue to resonate and arguably deepen.
Will GTI’s 100-day average continue trend up? In the summer, the indicator began to wobble, but in recent weeks has revived with an upside bias—an encouraging sign, and one in sharp contrast to the slide that become conspicious on this front for GTI by May 2022.
Market signals have been choppy lately, giving some of us pause about what comes next. Nonetheless, the overall signal is skewing positive once more, albeit modestly so. Your editor is on high alert for clues that this positive skew is strengthening or weakening. For the moment, we’re still in the former camp.
Supporting our cautious but still positive near-term view is the mostly bullish trend profiles for global markets on a more granular level, as shown in the table below. The Signal scores for the majority of markets continue to post robust bullish readings (highlighted in green). For the rest of the field, which reflect weaker trends, it’s notable that there are no net-negative bearish readings.
Markets aren’t perfectly efficient and so there’s reason to wonder if the crowd’s optimism is misguided. Maybe. It wouldn’t be the first time. But the majority of the trend analytics suggest it’s premature to make an outsized bet on assuming markets, writ large are wrong.
Then again, that recommendation reflects your editor’s bias. Specifically, yours truly favors trend signals as opposed to raw contrarian bets. Each has a particular set of pros and cons. For what it’s worth, the former looks superior to the latter, based on history and zero ability to predict the future. This reasoning also draws on a simple empircal fact: markets (including GTI) tend to rise most of the time. The challenge, of course, is deciding what to do, and when to do it, when the trend starts to look unfriendly. ■