Weekly Edge: ETF Relative Strength Indicates Bulls Still In Charge

by: Invest With An Edge

In recent weeks, leadership among ETF sectors suggests that market leadership is driven by a mix of influences. All of our Benchmark ETFs indicate less bullishness, which may be due to the typical summer doldrums in global investment markets. Bearish and lagging sectors are at the bottom of the momentum ranking because investors appear to be less bullish on them - not necessarily more bearish. In other words, at least domestically, investors appear modestly less enthusiastic about the leaders than the previous week, but they are not yet ready to move up the rankings those sectors and factors consider defensive.

Sectors: The leading Sector Benchmark ETFs exhibited some interesting shifts this past week. Ron pointed out the very wide spread between the top and the bottom of the sector rankings the week before. That was resolved this past week by a decrease in both Energy's negative momentum and Technology's positive momentum. The spread between the two declined from 68 momentum points the previous week to 40 this past week. Ron also commented on how long typically defensive sectors such as Utilities and Consumer Staples could coexist at the top of the leaderboard with the offensive sector Technology. That "stress" at the top of the ranking was partially resolved this week, as Consumer Staples slipped significantly in the rankings, making room for Healthcare.

The Sector Benchmark ETF leaderboard is not highly "organized." This means that among the leading sectors, there is a mix of bullish economically sensitive sectors such as Technology, Materials, and Industrials. However, also near the top of the list are generally defensive sectors such as Utilities and Healthcare. On the other hand, Energy, an economically sensitive sector, is at the bottom of the list with Consumer Discretionary, an offensive sector in the bottom half of the ranking.

This order of sector relative strength may be explained more by special situations than by economic or market expectations. Rising interest rates may be highlighting the yield of Utility stocks while taking the glow off Real Estate. Healthcare may be benefiting from investor sentiment about pending healthcare legislation, we know price wars are affecting telecom earnings, and an oil glut is holding down energy prices. That the leaders and laggards can be explained by reasons other than market or economic themes is a sign that investors have had little incentive to change their long-term expectations.

Factors: Momentum, Growth, and Small Cap are the top factors among our Factor Benchmark ETFs. This is a bullish alignment of factor rankings. This alignment of rank at the top of the list is reinforced by the factors at the bottom of the list, which are all classic defensive safe havens - Value, Fundamental, Yield, and High Beta. While the factor rankings are clearly bullish, they are a bit less enthusiastically so than the previous week: There are only two factors with momentum scores greater than 20 (compared to three the previous week), and the sum of the top three ranking scores is 77 (compared to 89 the previous week). On the other hand, the sum of the bottom three momentum scores increased from 6 to 30, so there was also a reduction in bearish posturing.

Global: There was little change in rank and overall momentum level among the Global Benchmark ETFs. The top-ranked regions continue to include China, eurozone, and EAFE. This ranking continues to suggest that investors who long underweighted those regions are now directing new capital overseas to regions now believed to be economically and politically stable and growing. Conversely, global regions such as Latin America and UK are lagging possibly because of investor uncertainty about their political futures. This ranking may not indicate a belief that the leading regions will have the best economies going forward, but that those economies are not now in danger.

Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.