From the desk of Steve Strazza @sstrazza
Welcome to our latest RPP Report, where we publish return 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 absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
We consider this our weekly state of the union address as we break down and reiterate both our tactical and structural outlook on various asset classes and discuss the most important themes and developments currently playing out in markets all around the world.
While the weight of the evidence still remains in the bullish camp, bears seem to add to their list of talking points with every passing week of late. We believe the highest probability outcome over the coming weeks to months is for risk assets to remain in a mixed and messy environment. Once we begin to see evidence that indicates the current "chop fest" is nearing an end - which could simply come in the form of a reduction in the number of bearish data points, we think this party resumes in the direction of the primary trend... which remains aggressively higher in most risk assets.
But as the evidence becomes increasingly mixed, so does the way we want to approach the market and position ourselves to profit from the present environment. While we're still buying plenty of stocks exhibiting leadership all around the globe... for the first time in over a year, we're focused more on shorting the losers.
The latest incoming evidence has been overwhelmingly bearish and has continued to reinforce our cautionary outlook. Although, we have reason to believe this could finally be changing as risk assets made some real progress since our last RPP Report.
We still need to see some follow-through and confirmation of these developments, but over the past two weeks, we've seen more bullish data points than we have in months.
The ever-growing list of stocks and other risk assets consolidating at resistance has been a main theme we've hit on relentlessly of late. This had caused us to turn more and more cautious in recent months.
Well, much of the bullish information we're seeing is from many of these holding patterns resolving higher from key levels of interest.
We saw more of this from international equities than we did from the US as overseas continues to be where the strength is. We'll focus mainly on this theme in today's report.
And we're not just talking about any old targets or logical resistance levels here...
Many of these indexes (and other risk assets) are testing critical former highs. In many cases, all-time highs - the vast majority of which were made during one of the following periods:
- When global risk peaked in 2018.
- OR when markets peaked all the way back prior to the financial crisis.
We're seeing a lot of the former within the US, and the latter when we look at markets outside the US. This makes a lot of sense when we consider the decade-long outperformance from American stocks since the sub-prime crash.
So let's stick with this theme and kick off today's report with some examples from our International ETF universe:
At the index level, we're seeing relative strength move out along the risk curve... EXCEPT for one of the most historically "risk-on" diversified international indexes, Emerging Markets $EEM. Notice how they're the only speck of red in the above table...
We've already cautioned members to expect this underperformance from EM as the commodity bull cycle matured and the rotation into value and out of growth accelerated. Here's what we said in a post earlier this year:
Long story short, today’s Emerging Markets Index is driven mainly by growth stocks and China. This marks a significant departure from the value stocks and more cyclical regions that had been responsible for driving gains in this index during the last commodities boom.
Now back to the theme of international indexes consolidating at critical inflection points. Here is our current Global Market Scorecard:
Nearly 90% of these charts are currently above our risk levels and thus in "bullish territory." And of the just four holdouts in this list of almost thirty global indexes and ETFs, three of them, are currently within just a few percent of our level.
If they break out, that leaves us with just Indonesia. Let's just say, we'd be more than okay with that. So with the tailwind of broadening global participation at our backs, we think this list is close to being retired... If of course, things stay the way they are and only improve from here...
BUT, this is certainly no foregone conclusion yet. Being as so many of these indexes remain close to their levels, we could see things change just as quickly in favor of the bears.
When we first shared this checklist in a post about a month ago, we warned of this...
Anything can happen here, so be prepared... Notice just how close some of these indexes are to our levels.
Back at the end of April, 3/4's of our list was in bullish territory. And when we checked back in two weeks ago, it had fallen even lower to 71%. Here's a look at that table, as of May 24th.
We knew this list would sway around in a volatile fashion because so many of the indexes were (and still are) trading right at, or near our risk levels. As long as this remains the case, we'll continue to keep a close eye on this checklist and the related charts.
Speaking of which, one of my favorites on this list is Chile $ECH. The reason is simple: It is hands-down one of the WEAKEST countries in the world on a structural basis.
When looking for signs of coming or continued broad market weakness, always check in on the LAGGARDS as they should crack first in the case of a selloff:
It's trading right at our risk level near its 2015-16 & 2019 lows ~29. If Chile is above this critical level of former support, the risk is to the upside and we're targeting the year-to-date highs of about 36 over the next 2-4 months.
But more importantly, the market is telling us that we don't even want to be shorting one of the world's secular laggards right now. That is some serious information about the present environment for international equities... and it is most definitely NOT bearish.
Let's check in on another perennial laggard from our expanded universe of international country ETFs, Nigeria $NGE:
It continues to stair-step higher and work its way toward the upper bounds of this rounding bottom formation. Last week, price violated its key pivot highs from March and April, and this week we're seeing some steady follow-through higher as NGE appears to be resolving higher from yet another consolidation.
If we're above 12.40 we want to be long with a target of 15.20 over the coming 2-4 months.
Oh, and just to be clear - the international secular leaders are still making new highs as well.
Denmark and Finland are some fine examples of this as both are currently trading at fresh all-time highs.
Sticking with the theme of international equities battling with critical levels of resistance, let's move on to our Global Indexes table:
Look at the strength coming out of Developed Europe over the short and medium term.
And could there be a more logical level for Eurozone stocks to reassert their leadership around the globe?
One of the biggest Eurozone laggards has been the United Kingdom.
The chart below illustrates this well as the FTSE 100 has literally made ZERO progress for over 20-years now:
This is what you call a multi-decade mess-fest. This one should probably be on our checklist also with a risk level of just beneath 7,000.
And once again, what do ya know!? The FTSE is trading right smack dab at that level as we speak. It's impossible to overstate just how important of a development it would be to see this index follow through with a strong leg back toward its all-time highs from 2018.
The German DAX and Euro Stoxx 600 having already reclaimed their former record highs bodes well for the FTSE here, as we think it eventually follows its EU peers to new highs also.
