The ETF Portfolio Strategist: 9 Oct 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
I’ve been advising readers to stay defensive for what seems like ages, but the advice still applies and will remain so for as long the market trends skew negative. On that front, nothing’s changed in the trading week through Friday, Oct. 7. I’m still looking for early signs of market bottoms but so far the markets keep responding: Cool your jets.
But wait, that’s not entirely correct. Shares in Latin/South America (ILF) are showing signs of breaking from the pack with an upside bias. The ETF led the rebound in global markets last week for our 16-fund opportunity set (see table below). More importantly, ILF is now the upside outlier for the G.B16 funds, posting a strong +4 Signal score (for details on the methodology, see this summary).
Looking at ILF’s chart, however, suggests the fund is still in a trading range.
By contrast, ILF’s medium-long trend indicator (#4 in the table above) looks more promising.
It’s still early to make a high-confidence call that ILF is set for an extended upside run, but on a relative basis the ETF is starting to look encouraging. A key test in thee days and weeks ahead: Will ILF be able to maintain it’s strong Signal score? Part of the answer will be driven by how the broad ebb and flow of risk-on/risk-off sentiment fares. ILF still faces strong headwinds if risk-off continues to dominate in global markets. Escaping beta’s gravity, in other words, is always a tough challenge.
Elsewhere in global markets, the negative winds of selling remains overt. Despite last week’s pop for most risk assets, the trend still looks worrisome. Consider US stocks: VTI rallied last week (for the first time in four weeks), but most of the runup in the early part of the week reversed by Friday. Meanwhile, the downside trend still appears intact. In the last week of September, VTI broke through its June low, signaling more selling ahead. The latest increase holds out the possibility that the recent lows may hold, but if the lower floor set in late-September gives way it may open the floodgates to the downside. VTI’s deeply bearish profile via the Signal score in the table above suggests that’s more than a trivial possibility.
A similar story continues to apply to US Treasuries (IEF). The ETF fell again last week, marking the eighth straight weekly slide. A key factor: there’s scant evidence on the immediate horizon for a Federal Reserve pivot on interest-rate hikes. Fed funds futures are pricing in high odds (80%-plus) for another 75-basis-points rate hike at the next FOMC meeting (Nov. 2). Let’s see if this week’s update for consumer inflation in September (Thurs., Oct. 13) changes the calculus.
Negative momentum continues to bedevil our portfolio strategy benchmarks (see this summary for design details). Once again, all five are pinned at maximum bearish readings for the Signal score.
In search of a bullish turning point, I’m looking for a sustained recovery in my proprietary trend metrics. There was a bounce recently, but it was mild and didn’t take, as shown in the chart below, which tracks one of the indicators that feeds into the aggregated Signal score.
When the trend indexes turn higher on a persistent basis, that’ll be an encouraging sign that the net-bearish climate has run out of road. But for the moment, that turning point doesn’t appear imminent. ■