Defense stocks rose amid news of the continuation of U.S. presence in Afghanistan. Companies such as Northrop Grumman, Lockheed Martin, and Boeing directly benefited from the speech. Since the U.S. presidential election, Boeing stock has risen 31%. The S&P 500 aerospace and defense index has also done well, increasing 21% since the election—almost double the returns of the general market. In short, with Trump focusing on the U.S. military, the military sector is expected to profit for the duration of his administration.

Sectors: The leading Sector Benchmark ETFs exhibited relatively major shifts over the past week. Utilities rose, and Technology and Financials fell significantly. Momentum scores of most sectors decreased for the week. The exceptions were Utilities and Materials. Real Estate, Industrials, Telecom, and Discretionary fell into the red. The spread between the highest and lowest increased from 42 to 54. In terms of ranking organization, there appears to be no general trend between cyclicals and defensive sectors. Technology (a highly cyclical sector) performed as well as Utilities (a typically defensive sector). Materials was the only sector to change from negative to positive for the week, suggesting a slight reversion for a potential slowdown in the economy. That, coupled with an overall decrease in momentum for each sector (except Utilities and Consumer Staples), also suggests the potential for a market slowdown.

We appear to be approaching a potential inflection point in the market. Utilities and Consumer Staples were the only sectors to increase momentum last week, while Energy and Discretionary are at the bottom of sector rankings. Overall, a slowdown seems to be more likely than a continuation of the momentum that we’ve seen for the year so far.

There are some specific concerns for certain sectors that may be affecting their rank. The overall lower price of oil has caused the Energy sector (typically cyclical) to continue to fall near the bottom of the rankings, from -24 to -33.

Factors: The leading Factor Benchmark ETFs did not fare well this week. Momentum and Low Volatility are the top-ranked factors, and High Beta and Small Size are still at the bottom. Risk-off factors such as Quality and Yield are concentrated in the center of the rankings, but Low Volatility has moved up. However, Momentum typically continues to work as a factor until the market shifts as a whole, while Small Size has a tendency to lead the market, suggesting a warning moving forward. The overall momentum ranking for all factors decreased last week, with the average momentum score changing from 5.5 to 0.6. The spread in values stayed the same at 29, suggesting the top-ranked factors and the bottom-ranked factors from the previous week are both idle.

Global: Rankings in the leading Global Benchmark ETFs are also less clear about the sentiment of the market. Emerging Markets, China, and Latin America still lead the rankings, and their momentum scores have risen for the week. China’s momentum score rose from 35 to 42, while more developed markets such as the UK fell from 3 to -1. The average momentum score globally increased from 14.9 to 15.5. The US was second from the bottom in terms of absolute rank. In developed markets, the US decreased the most, from 7 to 2.

Two week Edge Chart 08/23/17

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