The ETF Portfolio Strategist: 2 Oct 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Staying defensive looked compelling last week and the advice still applies after a subsequent run of five trading days. Two of the ETFs in our 16-fund global opportunity set (per the table below) are no longer pinned to the floor at maximum bearish readings via the Signal indicator (for details on the methodology, see this summary). But that looks like noise and the data overall implies that we’re still a long way from convincing signs that a extended rally has started or is imminent.
The strongest performer at the moment (i.e. the softest bearish Signal reading) for the list above: shares in Latin America (ILF). Although the ETF fell 2.7% last week, it continues to trade in a range. Compared with assets generally, the performance shines as an example of relative strength. But the comparison is a low bar. Meanwhile, the weak price trend for ILF suggests it’s still prudent to keep expectations in check for this slice of global markets.
Ditto for the last week’s best performer for the opportunity set: stocks in Europe (VGK). The fund lost a relatively light 0.8% last week. But the VGK’s trend still looks deeply negative and so bottom-fishing isn’t recommended.
Staying defense with US stocks remains compelling, too. VTI closed lower again last week and broke through the summer low. The breach suggests that a bottom still lies somewhere in the future.
The price trend for US Treasuries looks even worse. You don’t need to spend much time with analytics to recognize that downside risk for IEF appears to be high.
To be fair, the pop in bond yields (which move inversely with price) is starting to look attractive, at least in relative terms, and so the question is whether the allure of higher nominal payouts will begin to stabilize Treasury prices? That’s a scenario worth monitoring, but for the moment there’s no sign that prices are finding a floor.
In the general cause of looking for signs that the rout in markets has run out of road there are many tools. One on short list is the evolution in our Signal scores. For example, the chart below shows recent history of VTI’s medium-long trend signal (#4 in the table above). At some point this will rebound and point to better days ahead for US stocks. For now, the odds remain low that such a turning point is on the immediate horizon.
Meanwhile, the bearish trends continue to dominate our portfolio strategy benchmarks. (See this summary for design details on the benchmarks.) Better days are coming, but the trend data continue to suggest managing expectations down for multi-asset-class portfolios. ■