Leadership among ETF sectors suggests that domestic markets may be nearing an inflection point, with decreased organization and an overall decrease in market momentum. Sector and Factor influences both suggest that inflection points may be on the horizon, though we may have to wait until next week to confirm that the market isn’t simply consolidating after a significant run-up in the domestic equity markets. Globally, however, investors still appear to have an appetite for risk, with emerging markets increasing momentum overall. Global markets are still highly organized: The riskiest global markets and emerging markets lead the pack. Domestic and other developed countries rank near the bottom and have decreased in overall momentum from last week.
Sectors: The leading Sector Benchmark ETFs exhibited shifts over the past week, but Technology continued to lead, tied with Financials. This past week, Technology declined, and Energy and Telecom improved, though Energy is still at the bottom of the pack. The spread between the highest and lowest sectors decreased from 41 to 22. Utilities and Telecom increased the most for the week, suggesting a resurgence in the defensive sectors. While still positive and near the top of the ranking, cyclicals such as Technology and Materials decreased. Both suggest that the market, while still positive, is beginning to slow, and that risk is less desirable than last week.
Currently, the ranking for sectors is not entirely organized. Cyclicals and defensive sectors are mixed, with neither concentrated near the top or bottom of the sector ranking. Overall, momentum scores decreased from last week, and the overall spread between maximum and minimum ranking decreased. This suggests that we may be nearing a potential inflection point in sector momentums. Next week’s momentum may confirm this trend. If so, we may expect more defensive stocks organized near the top and cyclicals near the bottom ranks with overall momentum decreased once more. However, it’s currently impossible to infer if we’re at an inflection point or if the market is simply in consolidation mode.
Specific concerns for certain sectors may be affecting their rank. The overall lower price of oil has caused the Energy sector (typically cyclical) to fall near the bottom of rankings. Health Care is facing increased political uncertainty as the administration threatens to withhold payments from insurance companies. This may have caused the sector to drop more rapidly than typical market movement.
Factors: The leading Factor Benchmark ETFs are a bit more organized than sectors, with Momentum and Growth near the top and Yield and Dividend Growth near the bottom. However, Value is the third-highest ranked factor, which typically indicates a risk-off scenario. Low Volatility also outranks High Beta, which suggests investors are craving lower risk in their investments at this point. This is a significant departure from last week when the message from the market was clearly risk-on. As suggested by the sector organization, rankings may suggest an inflection point in the market. It’s possible for factors and sectors to reorganize themselves before such a change in the market occurs. As in sectors, the overall momentum ranking for all factors has increased from last week. The spread in values has decreased from 29 to 17, suggesting the top-ranked factors are slowing and the bottom-ranked factors from last week are picking up.
Global: In the leading Global Benchmark ETFs, the message is consistent with last week’s rankings: risk is on. The riskiest global markets and emerging markets are at the top of the ranking. China, at the very top, increased its value from 48 to 52. The top-four ranked geographic areas are all in emerging markets, with the bottom ranks populated by developed countries. Canada fell the most, four points, while the US and EAFE fell three points each. Despite any geopolitical concerns over U.S. tensions with North Korea, China continues to be a desirable destination for investor funds, with the market shrugging off these concerns. However, it appears that developed markets are not retaining the same appeal. Positive momentum has decreased for most of these locations. Unlike last week, the overall momentum change for all markets is not strongly up or down, so for the time being, the overall impression of the global market momentum is mixed.
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