The ETF Portfolio Strategist: 11 Sep 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Markets rebounded last week, offering some respite from the latest selling wave. Refreshing, but the downside bias persists, based on our proprietary trend analytics. For details on the methodology, see this summary.
If you’re hunting for a speculative bet on upside action, stocks in Latin America (ILF) are worth a look. The iShares Latin America 40 ETF (ILF) was the strongest performer for our 16-fund global opportunity set over the past five trading days. (For the shortened US holiday trading week, ILF was 2.1%.) More importantly, ILF is now posting the strongest Signal score, by far +3.
ILF’s chart action doesn’t look particularly encouraging, however, although in the current climate the fund’s ability to tread water (sort of) is impressive relative to other slices of global markets.
US stocks (VTI), by comparison, appear more vulnerable. Despite the latest pop, count us as skeptical that we’ve seen the bottom. Or perhaps it’s safer to say that the case for an upside run remains weak.
One reason for staying cautious on US shares: our Medium-Long Trend data (one of five factors that comprise the Signal score) suggests the recent bounce is still soft and therefore unlikely run, as suggested in the historical readings for the metric per the chart below. Until we see readings hold above 0.5 for several weeks, the outlook looks shaky.
There are plenty of risk factors that inspire caution these days, including the threat of ongoing interest-rate hikes. Fed funds futures are pricing in a 91% probability of another 75-basis-points hike at the next FOMC meeting (Sep. 21). But perhaps the crowd will trim that view after Tuesday’s update on US consumer inflation for August (Sep. 13). Economists are looking for a pullback in year-over-year headline inflation. Encouraging, although the projected uptick in core inflation suggests it’s premature to dismiss inflation’s threat.
Treasuries are certainly pricing in doubt that the worst has passed for tighter monetary policy. Our Signal score for the iShares 7-10 Year Treasury Bond ETF (IEF) is pinned to the maximum bearish reading: -5. Not surprisingly, the IEF’s chart shows a strong downtrend is still in progress. A key question for the days ahead: Will IEF breach the recent lows? If so, that would trigger a fresh reason to sell from a technical perspective.
Trend data for our portfolio strategy benchmarks looks a bit kinder after last week’s rallies, but we’re still nowhere near the tipping point for calling a clear switch to bullish conditions. The data still suggests a case for staying defensive. (See this summary for design details on the benchmarks.)