Groundhog Day Redux

One month into the New Year and we already regret burning through the “pattern” theme for our Monday updates as more easy monetary policy actions by a major central bank helped save equity markets for a second week in a row.  In fact, we even have the pattern down to the point where for two consecutive weeks the S&P 500 has advanced around .5% on Thursday before closing out the week with a 2% surge on Friday either because middling economic news here at home reinforces the hope that the Federal Reserve will be forced to abandon tightening or that OPEC might finally persuade the Saudi’s to join a concerted effort to reduce production and ease the oil glut.  Whatever the cause, the effect on market sentiment is undeniable with a surge of “buy the dip articles” as most major indices back away from oversold territory but according to our Quant Movers report, the make-up of where investors are putting their capital to work has been radically altered.  Even as energy and utility funds see their behavioral scores surge, do they have the staying power to help keep the S&P 500 from backsliding further?

Foreign equity funds with a distinctly emerging market flavor were the biggest winners last week with both of the funds discussed in our most recent post, the iShares Latin America 40 ETF (ILF) and the iShares MSCI Chile Fund (ECH), among the big winners although Latin American equities in general came out far ahead of the EM pack.  In fact, we witnessed a complete reversal of the point spread between Chinese A-share funds and Brazilian equities that dominated so much of the trading at the height of the China bubble in late 2014 with the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) ending the week down 5.42% while the iShares MSCI Brazil ETF (EWZ) was up over 9.68%!  It shouldn’t take you more than two guesses as to the why as Uncle Buck continued to lose ground against the Chilean Peso last week while suffering its first major reversals against the Brazilian Real and Mexican Peso’s since November as the story supporting further Fed rate hikes continues to lose its narrative.  If you’re wondering why you don’t see more Latin American funds on our weekly list of biggest quant movers, it’s because their scores are already so high that even a 17 point (34%) jump in the behavioral score for the iShares MSCI Mexico Fund (EWW) last week wouldn’t make the top ten!

But the EWW wasn’t the only fund that failed to make the list of biggest quant movers as both the utilities and energy sectors were completely unrepresented and for more on the why, we’re moving over to the ETFG Behavioral Top 100.  Mexico, energy and utilities funds are all missing from the Quant movers list for the same reason; their behavioral scores have been steadily rising for a matter of weeks and we’re now at the point where they’re starting to dominate the Top 100.  EWW is already #3 on our list, just behind the PowerShares S&P SmallCap Utilities Portfolio (PSCU) and the Vanguard Consumer Staples Fund (VDC) which comes in at #1.  In fact, after looking over the list and excluding broad index or style box funds (along with levered and inverse products) and just focusing on those in our North American category, there we had a matching set of five utility and five consumer staples funds along with three energy funds in the top 100. Putting that into perspective, we only have nine domestic funds in both the utility (one of which is so new it doesn’t have a score yet) and consumer staples categories meaning that both sectors have become so popular that it’s hard to find any fund that hasn’t seen its momentum scores pushed up to historic highs!  That doesn’t mean either sector can’t keep outperforming in the near-term, but it would indicate that the upward bias might begin to cool at least in the near-term.

Energy funds are a different story as only three domestic funds currently make the top 100 and while a number of sector funds strongly outperformed even the Energy Select Sector SPDR’s 4.4% (XLE) last week, the fact that they did so and still remain off our top 100 list could indicate that the positive trend in energy stocks still has a ways to run.  Ultimately, what has us curious is whether the strong performances by the “value” sectors is going to be enough to keep lifting the S&P 500 beyond the 1950 level that acted as support last summer.  Value funds might have strongly outperformed growth funds last week, but the long rout in energy stocks has done significant damage to their standing in the broader market with the sector now making up just 6.5% of the S&P 500, which when added to the 10% made up by consumer staples and whopping 3% by utilities stocks means that all three of the biggest movers over the last few weeks make up less than 20% of the S&P’s market cap.  Technology stocks are still the biggest contributor at 18.5% but more troubling for investors should be the weakness in healthcare names since a five year long bull market has pushed their valuations to the point where they make up over 15.5% of the S&P 500!  A significant reason behind last week’s uninspiring 1.68% gain by the S&P 500 was the dead weight of those healthcare and especially biotech names, with the iShares Biotechnology Fund (IBB) down over 7.28%!

So does that mean equities can’t continue to make more headway and instead we’re doomed to an endless cycle of lower highs and lower lows like some nightmarish Groundhog Day?  Not necessarily, but to use a lazy analogy, we need the energy sector to pour more gas on the fire.  After last week’s data point driven rally, we need either more bad economic news or an agreement from OPEC on how to curb production to help the rally in energy stocks power higher and hopefully where it can spread to the other sectors to pull the rest of the market higher.  Otherwise that pattern that’s dominated equity markets for the last two weeks might just be the last hurrah before a minor correction turns into a full-blown roaring bear market.

Thank you for reading ETF Global Perspectives!


_______________________________________________________________
Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.