The ETF Portfolio Strategist: 23 October 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
The majority of global markets posted substantial gains last week, prompting some analysts to wonder if the broad-based selling pressure has finally been exhausted. No one can say for sure, but the numbers and trends still suggest caution to this observer.
Rest assured that I’ll be wrong about calling a bottom in real time. But given the choice of being early or late for the pivot in markets from bearish to bullish, the latter is preferred. Why? If you’re early, additional losses may await following purchases (or raising allocations). That’s a problem if the bear market runs for longer, and goes deeper than expected. By contrast, erring on the side of caution and being late to the rally, with the goal of developing a higher level of confidence that the bounce is genuine, translates to lesser gains compared with an earlier if riskier bull call. Pick your poison.
Meanwhile, let’s take a look at our 16-fund global opportunity set. Latin America equities regained leadership last week with a sizzling 9.3% return. The iShares Latin America 40 ETF (ILF) has been highlighted on these pages in recent weeks (see here, for instance) for its relatively bullish posture and the fund’s latest surge keeps it on our short list. It doesn’t hurt that the fund’s Signal score is again at a maximum=—bullish: +5. For details on the Signal methodology, see this summary.
ILF has posted strong rallies in recent history, which caught my attention given the weakness elsewhere in the world. What makes the latest pop especially intriguing is that the ETF closed well above its trading range for the past 2-1/2 months. Is this a sign that ILF will run higher? Let’s put it this way: it adds one more reason to forecast higher prices in the near term.
US equities participated in last week’s rally. Vanguard Total US Stock Market (VTI) rose 4.5%, the fund’s strongest rally in more than a month. The gain renews debate about whether recent lows mark a bottom. Count me as skeptical. One weekly advance, even a strong one, is hardly compelling evidence that the long-running downtrend has run out of momentum. All the more so since VTI’s Signal score remains moderately bearish.
One slice of markets where there’s no room for debate: US Treasuries, which remain deep in the throes of a bear market. The iShares 7-10 Year Treasury Bond ETF (IEF) fell sharply last week, marking the tenth straight weekly loss. What more do you need to know?
A relief rally for IEF is probably near, but a strategic turnaround for the fund is still nowhere on the near-term horizon. Although the ongoing rise in yields is starting to attract interest from the crowd, the potential for capital losses is more than trivial and so your editor remains defensive on the outlook for government bonds.
There are hints that the deeply bearish momentum for our portfolio strategy benchmarks is starting to lift. These are still early days and so it’s premature to read too much into the latest results. Nonetheless, the week just ended reflects Signal scores that, for the first time in six weeks, aren’t pinned to maximum bearish readings across the board. See this summary for design details on the benchmarks.
The Global Market Index (GMI) — a passive, unmanaged mix of all the major asset classes, weighted by market values — rose to a moderately negative -2 at Friday’s close. The rest of the field also bounced off of -5 results. Staying defensive remains prudent, but perhaps markets are near a point of stabilizing after a months of suffering.
The ability (or lack thereof) of the benchmarks to stay above -5 Signal scores over the next several weeks will help us decide if a sentiment change is brewing. ■