The ETF Portfolio Strategist: 29 OCT 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Weak market conditions persisted last week, again taking a toll on four varieties of asset allocation risk, based on the quartet of iShares ETFs tracked on these pages. Aggressive allocation (AOA) fell the most, dropping 1.5%, although the fund is still posting the strongest year-to-date gain: +3.5%.
The moderately bearish Signal scores (see table below), however, suggest that downside risk continues to dominate. Accordingly, the case for defensive allocations still looks compelling. See this summary for details on the data in the tables below.
The technical profiles for the ETFs aren’t encouraging either. The conservative fund’s downtrend, for instance, is particularly weak in the wake of AOK’s 10-week average moving further below its 40-week counterpart.
Reviewing global markets on a more granular level paints a mixed picture for last week, with several components showing gains. US investment-grade corporates (LQD) led the winners with a 1.0% advance, but a bearish bias for the fund still applies and so the latest pop looks like noise amid an ongoing negative signal.
The upside outlier for markets remains commodities (GCC), which again is posting a a bullish Signal score. Encouraging, but I remain cautious on the near-term outlook because the upbeat profile has yet to translate into a conspicuous uptrend. As noted in recent weeks, until GCC breaks above its trading-range ceiling — roughly 18 — the odds appear mixed that the recent relative strength is laying the groundwork for an extended bull run that lifts the ETF materially higher.
Some of GCC’s competitors, with higher energy weights, look a bit more compelling, but still not enough to trigger an all-out buy. The iShares S&P GSCI Commodity Indexed Trust (GSG), for example, has posted a stronger upside run lately vs. GCC, but here too the trading range issue still appears likely to dominate until further notice.
By contrast, a subcomponent of GCC — the agricultural commodities space via (DBA) — reflects a more compelling upside bias. Invesco DB Agriculture Fund, which holds a mix of agriculture assets via futures, is looking interesting as it extends its rally. The ETF is approaching its 2022 high after breaking out of its trading range earlier in the year. Decisively punching above the ~22.5 mark could unleash a new leg higher as the market extends the upside repricing of various food groups.
Meanwhile, the elephant in the room for evaluating near-term risk at the moment continues to be the Middle East conflict. Until clearer signs of the endgame arise, Israel’s ground campaign in Gaza serves as reason to stay defensive.
The key issue is evaluating the potential for a wider regional war that draws in the US. Although there have been attacks on US forces in the Middle East by Iranian proxies in recent days, the Pentagon has responded with restraint via limiting bombings. Given the fluid situation in the Irsael-Gaza conflict, and the potential for more-aggressive responses from various actors and governments in the region, it’s not yet obvious that the worst has passed.
“There’s a real risk of escalation,” says Sanam Vakil, the director of the Middle East and North Africa program at Chatham House, a London-based think tank, in an interview with NBC News today.
Until that risk eases considerably, investors with low-to-moderate risk tolerances should proceed cautiously. What would consitute a clear and significant reduction in geopolitical risk in the Middle East? Hard to say precisely at this point, although it’ll be self-evident when it arrives. Meanwhile, I continue to err on the side of caution re: asset positioning.
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