Last week I mentioned that longer-term trends in leadership tend to be based on macro factors such as economic trends and changes in political leadership or policies. The change in leaders and laggards among the ranking of our Sector Benchmark ETFs and our Factor Benchmark ETFs tell us a good bit about changes that may be coming in the domestic economy. For example, this week there were only minor rank changes. This suggests that, despite the usual avalanche of news, investors see few developments that would change their relatively optimistic expectations for the economy. In general, the lagging sectors appear to be there because they are perceived to be unnecessarily defensive or are special situations.
There were only minor rank changes in sectors and factors, but the tables offer more to the story. There was an overall reduction of momentum in most sectors and factors. This suggests that investors, at least domestically, were not inspired to make changes in their view of markets, nor were they inspired to commit meaningful new capital to their positions. However, the story is different among our Global Edge Benchmark ETFs. That is where the action was seen this past week.
Sectors: The leading Sector Benchmark ETFs for the past several weeks suggest that the economy is growing and expected to continue to grow. Investors continue to favor Technology and Discretionary. This week Health Care moved into the #3 slot, replacing Industrials. Investors are not concerned about the immediate prospects for sectors benefiting the most from a growing economy. It is fitting, then, that investors have a diminished appetite for Real Estate, Telecom, and Energy. These lagging sectors may be explained more by special situations than by economic expectations. Rising interest rates may be taking the glow off Real Estate, price wars are affecting Telecom earnings, and an oil glut is holding down energy prices. The leaders and laggards have not changed much in recent weeks, which is a sign that the news (real or fake) has done little to change investors’ near-term or long-term expectations. Put another way, there has been little to raise investors’ near-term or long-term investing-related fears.
Factors: Momentum and Growth are the top factors among our Factor Benchmark ETFs again for the week. This is very much in line with the sector rankings and what they say about investor expectations. This alignment of rank reinforces the view that investors have of the market and the economy. This is important insight because investors tend to invest with a view of the future rather than recognition of the past or present. This means that the economic growth that investors are positioning their money for is growth they expect in the future, not growth we have already experienced. When investors become concerned about future economic growth, we will see our rank order change significantly as investors seek defensive, rather than offensive, sectors and factors.
Global: There was a lot of activity among the Global Benchmark ETFs. There large changes in rank and also in the overall level of momentum among all of our Global Benchmark ETFs. There were some interesting changes this week: The weakest global regions are USA, Japan, Pacific x-Japan, and Canada. The top-ranked regions include Eurozone, China, and Emerging Markets. This ranking can most likely be attributed to investors’ long-term underweighting of those regions that are now leading the rankings. Conversely, they favored the regions that are now lagging. Therefore, this ranking may not reflect a belief that the leading regions will have the best economies going forward, but that those economies are not now in danger and therefore it is acceptable to weight them more normally in a global portfolio.
Also interesting is that 6 of the 11 leading Global Benchmark ETFs have momentum scores above 20. This is noteworthy because only one sector and two factors have momentum rankings greater than 20. So, the action is clearly in the Global Benchmark ETFs this week.
The following Edge Charts are market momentum snapshots. They provide a quick and easy way to help you visually get a handle on the overall state of the market. With these charts, you can assess both the relative strength and absolute strength (momentum) of more than 30 global equity market segments. Please refer to the Edge Chart User’s Guide for further explanation.
Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.