Weekly Preview (07-27-2020)

From the desk of Steve Strazza @Sstrazza

Every week we publish performance tables for a variety of different asset classes and categories along with commentary on each.

Looking at the past helps put the future into context. In this post, we review the relative strength trends at play and give our outlook and some of the things we're watching for in the week ahead.

This week we're going to highlight our International ETF and Global Index tables, and focus on some of the rotation we're seeing into more offensive assets across the board. Let's dive into it.

Emerging Markets $EEM, particularly Latin America $ILF, continue to rebound strong. These two indexes were this week's leaders on our International ETF list but notice that they are also the top performers over the trailing one and three month periods.

Latin America has really picked up the slack for Emerging Markets as the Asian-Pacific region and especially China have given back some gains recently after a strong start to the month. Emerging Markets are now just about 5% off their Q1 highs, which is about the same as the S&P 500 could say. With the way things have been going, EM may make it there first.

Emerging Markets have been outperforming the S&P 500 since May now (bottom pane). On a relative basis, this would be a very logical level to see this trend reverse in favor of EM as the EEM/SPY ratio is forming a short-term bottom at its all-time lows from 2003 as momentum diverges positively (not shown).

A break above the 46 area would put prices back above former resistance and at their highest level in over two years. Seeing Emerging Markets continue to grind higher on a relative and absolute basis could only be viewed as a positive when it comes to risk appetite for Global Equities.

Here is our Global Index table.

After a huge start to the month, the Shanghai Composite has consolidated and come close to filling its massive July 6th gap. This is constructive after such a strong rip higher.

As for the rest, the Wilshire, Nikkei and Dax Indexes are all within striking distance of their Q1 highs, so definitely look the best structurally. The others still have plenty of work to do.

Now for the US Indexes. I think this is the first time I can say Mid-Caps $MDY were the leaders for the week.

We're watching these lagging indexes, particularly Small $IWM and Mid-Caps, as well as Transports $DJT in the weeks ahead for healthy rotation and broadening participation among US Equities.

We're already seeing it as evidenced by Transports outperformance over the trailing month. Here is the chart.

The 9,700 level is key. If Transports are above that, the next logical stop is the Q1 highs, which would be a major bullish development.

Let's look at the sectors now. Something we're looking for in the coming weeks is a continued rotation into the lagging sectors of the market.

Industrials, Financials, and Energy are the serial undperperformers. You've seen our triple-pane chart of these laggards. Here is another way to visualize it. This is an equal-weight index of the three sectors overlaid with the S&P 500.