Leadership among ETF sectors continues to lack organization, suggesting that domestic markets may be nearing an inflection point, as overall market momentum decreases. For the past two weeks, sectors and factors have suggested a slowdown in the equity markets. Now, global rankings are also suggesting a potential slowdown, as overall global momentum has decreased, and the riskiest geographic areas have decreased the most. However, generally speaking, these are shorter-term trends that may merely indicate a period of consolidation rather than an overall reversal in equity market direction.
Sectors: The leading Sector Benchmark ETFs exhibited relatively small shifts over the past week. Technology continued to lead, tied with Utilities, and Financials declined. The momentum scores of all sectors except Consumer Staples decreased for the week; however, only Materials and Energy were negative. The spread between the highest and lowest increased from 34 to 42. 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 positive to negative for the week, suggesting a potential slowdown in the economy. That, coupled with an overall decrease in momentum for each sector (except Consumer Staples), also suggests the potential for a market slowdown.
We appear to be approaching a potential inflection point in the market. Consumer Staples was the only sector to increase momentum last week, while Energy and Materials are at the bottom of sector rankings. Overall, there appear to be more signs pointing to a slowdown 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 fall near the bottom of rankings. Increased political uncertainty from the administration’s threat to withhold payments from insurance companies may have caused Health Care to drop more rapidly than typical market movement.
Factors: The leading Factor Benchmark ETFs are also not particularly organized this week. Risk-on factors are at the top and bottom of the rankings. Momentum and Growth are the top-ranked factors, and High Beta and Small Size are at the bottom. Risk-off factors such as Quality, Yield, and Low Volatility are concentrated in the center of the rankings. However, Momentum typically continues to work as a factor up until the market shifts as a whole, while Small Size has a tendency to lead the market, suggesting caution going forward. As in sectors, the overall momentum ranking for all factors decreased last week, with the average momentum score changing from 11.5 to 5.5. The spread in values decreased from 30 to 29, suggesting the top-ranked factors are slowing and the bottom-ranked factors from the previous week are picking up.
Global: Rankings in the leading Global Benchmark ETFs are also less clear about the sentiment of the market. While Emerging Markets, China, and Latin America are leading the rankings, their momentum scores have also fallen the most for the week. China’s momentum score fell from 54 to 35, while more developed markets such as the US only fell from 12 to 7. The average momentum score globally decreased from 25.8 to 14.9. The US was third from the bottom in terms of absolute rank, but its momentum score fell the least. In developed markets, Canada fell the most, from 18 to 6. Canada is particularly susceptible to changes in commodity prices, particularly oil, which was down for the week.