The ETF Portfolio Strategist: 14 APR 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Global markets retreated for a second week. It’s still unclear if the downturn marks a peak in the bull run that began in October vs. noise that reflects consolidation before the next rally resumes. The widening Middle East war surely complicates the analysis. Iran launched an unprecedented wave of missile and drone attacks on Israel on Saturday night in retaliation for a strike in Damascus that killed several Iranians.
Geopolitical risk may be set for a new phase that takes a toll on the revival of risk-on sentiment. History suggests that geopolitical events are relatively short-lived in terms of impact market trends and so investors with medium- and longer-term horizons can afford to look through episodes, perhaps keeping an eye open to exploit short-term volatility in pursuit of longer-term goals.
From a tactical perspective, however, I’ll be watching this week’s trading activity to see if the return of negative short-term signals spread to medium-term windows for the set of global asset allocation funds shown in the table below. See this summary for details on the metrics in the tables below.
Trend 1 and Trend 2 profiles in the table above (the shortest windows) have fallen to bearish profiles. It could be noise, but if the negative momentum profiles spread to the longer-term windows (Trend 3 through 6) the case will strengthen for viewing the recent setback in markets as more signal than noise, in which case re-evaluating risk exposure will be timely.
It’s also productive to monitor trend behavior for asset allocation strategies via chart behavior, including the aggressive posture via AOA (per the weekly chart below). AOA’s sharp drop over the last two weeks looks worrisome, but only marginally so and from the perspective of the record high that was set three weeks ago. For now it’s reasonable to assume that the latest downshift is part of the normal ebb and flow of volatility. Short-term speculators may think otherwise, but for strategic-minded investors these are still early days for deciding that if it’s timely to switch to a risk-off posture in some degree.
To clarify the last point, the case for risk-off still looks weak within the context of trend analytics for medium- and long-term horizons. Contrarian and value-oriented methodologies are another matter, and one that we’ll sidestep here, other than to note that the case for paring risk exposure is more compelling — has been more compelling for weeks — from these perspectives. Note, for instance, the observation on these pages that AOA looked overvalued, as of Mar. 1 — see the last chart here. As usual, trend and value/contrarian strategies are often in conflict at any given time, which is why they’re complimentary, but that’s a topic for another time.
Meanwhile, a relatively granular set of global markets continue to highlight the ongoing trend strength of commodities (GCC). This is old news, of course — recall that on March 24, for instance, your editor opined that “the recent recovery in commodities (GCC) has revived the positive aura for the asset class.” The observation still holds after last week’s rally in GCC, which continues to post a strong Signal score of 6 — the highest possible bullish reading. Year to date, commodities (GCC) are now the top-performing asset class via a 14.1% rise.
For the immediate future, the spike in geopolitical risk a la the expansion of the Israel-Iran conflict will likely extend support for commodities — energy and gold in particular. But much depends on how, when and if Israel reacts to Iran’s attacks.
Geopolitical risk-based investment decisions are challenging to exploit for strategic-minded investors with a medium- or long-term horizon, but that doesn’t change the fact that everyone has to live through market activity one day at a time. As such, behavioral risk has become a real and present danger… again.
On that basis, the next several days/weeks could be unusually volatile, which can serve as yet another reminder that each investor needs to be clear about the time horizon that’s relevant and, in turn, what that implies for risk tolerance/risk management. There are no one-size-fits all answers, but there’s an obvious unforced error to avoid by thinking through your objectives, risk tolerance, etc. and how that applies when global affairs turn rocky.
On that note, it’s unclear if we’re looking at yet another new phase of Middle East conflict, but the non-zero probability just went up a few notches over the past 24 hours. As the Financial Times advises, “Iran rolls dice in conflict with Israel.” The world is now waiting to see the result once the dice settle.