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View from Toronto: Watch for Higher-Risk Assets Getting Overvalued

11/29/2017 3:06 pm EST

Focus: MARKETS

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

We are in risk-reduction mode, awaiting a test of the bottom of up-trend channels that started Nov. 2016. Ziad Jasani shares strategies for short-term and long-term traders this week. Join him  for a 3-hour deep dive on markets Dec. 2, 12 pm (EST). Register here.

Watch the related Market Strategy Session (3 hours) recorded Monday, Nov. 27:

video

chart 1

Global Risk Sentiment

Long-Term Equities & Bonds (first column) present as expensive, driven by nearly a decade of money printing and “market stimulation” by central banks.

Short-to-mid-term (3rd column) Defensive Asset Classes (below the S&P 500 Line) present as relatively cheaper. Higher Risk Asset Classes (above the S&P 500 line) present largely as scattered.

Areas of opportunity short-term are the Eurozone Financials (EUFN), EFEA (EFA), Euro Stoxx 50 (FEZ), EEM and Transports(IYT).

Most Defensive areas present with opportunity PFF, LQD, CPD-T while equities are holding the highs; and TLT, XBB-T, FXY and GLD/SLV in the event of equities turning down.

Overall configuration of the Global Risk-Ladder is tilted to risk off,  where if the S&P 500 is unable to sustain above 2,600 into week’s end we would look to close short-term positions; and if we see higher risk assets getting further over-valued into week’s end, we would suggest not to chase the move, but rather selling to price strength.

We are in risk-reduction mode, awaiting a test of the bottom of up-trend channels that started Nov.  2016.

chart 2

Major Index Direct Price Regression: This tool gives us a quick snapshot of whether major global trading blocs are on the cheaper or expensive side of annualized routines.

The bulk of spaces present as expensive, with EFA neutralizing and the TSX dislocated and expensive. This implies that positive catalysts are required to hold the highs, negative catalysts would be met with stronger selling pressure this week.

If medians on the S&P 500/Nasdaq up-trend channels are broken, we see a test of the bottom of the channels.

Using short-term capital to play bounces or break-outs makes more sense than investing at these highs; conversely price negativity is not likely to start a pull-back (-3% to -5%) or correction (-10% to -15%), but a drawdown (-1% to -3%) is realistic once the S&P 500 bearishly reverses below the 2,580 mark.

chart 3

Trading Bloc Positioning: When comparing major trading blocs (EEM, EFA, SPY, TSX/EWC) to the entire world of equities (ACWI) we are able to identify which blocs are relatively cheaper (easier path for money to flow in) vs. which blocs are relatively expensive (harder for money to flow in).

The third column within the chart at the right depicts the Eurozone Far East & Australasia (EFA) as cheaper, while Emerging Markets (EEM) have neutralized.

But North American Markets (SPY, DIA, IWM, TSX) continue to present on the expensive side. If the USD softens this week and if equity markets remain pointed north EFA, EEM would be better trading opportunities.

Portfolio managers are better off using short-term capital to trade EEM, EFA and start selling-into-strength within the S&P 500, TSX, Russell, Dow and even Nasdaq. The TSX is overdue for a pullback of -3% to -5% and most vulnerable.

Join experts at the Independent Investor Institute for a 3-hour deep dive on markets Saturday, December 2, 12 pm (EST). The session will be held online. Register here.  Or send Ziad an email with your request: ziad.jasani@educatedtrader.com