No investment category can be a market leader in all market conditions. Changes in relative strength help identify when various sectors, factors, and global regions fall in and out of favor. Some changes in leadership are shorter term in nature and those tend to be driven by current news of interest to investors. Longer term changes in leadership tend to be based on more macro factors like economic trends and changes in political leadership or policies.
The world has not been short of dramatic news recently. We have election news from Europe, inflation news from South America, and continued uncertainty over developing U.S. economic, tax, and healthcare policies. The fact is that global news like this is more the norm than the exception. That is one of the benefits of following market leading industry, factor, and geographic-region ETFs. When investment capital moves domestically or globally, it drives prices up where it is moving to and leaves a trail of lagging or falling prices from the source. This is the driving force behind relative strength. Identifying and following this flow of capital has proven to be advantageous to those investors who watch these flows.
Sectors: The leading Sector Benchmark ETFs for the past several weeks are suggesting that the economy is growing and expected to continue growing, and investors are comfortable taking on risk from sectors that will benefit the most from that growth. That means Technology, Discretionary, and Industrials remain at the top of the relative strength leader board. At the other end of the relative strength spectrum are Real Estate, Telecom, and Energy. The latter may be explained by the fear of how rising interest rates may affect real estate, price wars affecting telecom earnings, and an oil glut holding down energy prices. Given that the leaders and laggards have not changed much in recent weeks, one interpretation is that investors are voting with their dollars that we are not in the midst of a meaningful change that will impact market leadership.
Factors: Momentum is the top factor among our Factor Benchmark ETFs again this week. This is followed by Growth and Market Cap, with the latter moving up one slot in the rankings this week. Small company slid three slots in the rankings to sixth. Yield, High Beta, and Value remain at the bottom of the relative strength rankings. There were not a lot of large changes in the rankings that would suggest a change in favorable investor sentiment or commitment toward investing in the more growth-oriented areas of the stock market.
Global: There were more relative strength rank changes among our Global Benchmark ETFs than among the sector or factor rankings. Two things that stand out among the ranking leaders are that they are generally large-cap established markets and that they are in non-U.S. regions. The leading regions were Eurozone, EAFE, and UK. The latter moved up two slots in the rankings this past week. The lagging regions were Canada, Latin America, and Pacific x-Japan. This is interesting because Japan moved up three slots to seventh on the list from next to last. Our Global Benchmark ETFs have five regions exhibiting more than 20 momentum points, which is more than in any of our other Benchmark ETF ranking groups.
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.