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View from Toronto: Global Risk Sentiment, Top Indexes, Trading Blocs

10/16/2018 2:45 pm EST

Focus: MARKETS

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

During our Strategy Workshop (Oct. 12) we laid out rationale on where global risk sentiment lies, how we see major indexes and trading bloc positioning, writes Ziad Jasani Monday. The Nasdaq, Dow, Brazil, Russia and Japan seem expensive.

View my weekly strategy session video here.
Recorded: Oct. 15, 2018.
Duration: 1:14:12.

Global Risk Sentiment

Looking at the third column to the right (chart below) we see a comparison of higher risk asset classes and defensive asset classes back to the S&P 500 (SPY) on an annual basis.

Comparison to the S&P 500 creates a “risk-ladder” where market risk is considered neutral.

When we see more green above the SPY-line (middle line) and more red below we have a general “Risk On” signal; and vice-versa - red above, green below would be “Risk Off.”

Into the week ahead, we are getting a Risk On signal, as Defensives have gotten polarizingly expensive while higher risk asset classes remain relatively cheap and deeply oversold.

Our market modelling suggests a better chance for a bounce for equities this week; wherein we will be focused on accumulating: SPHB, QQQ, FEZ, IWM, RSP, EEM, EFA, FEZ.

However, we note that lift-off for a bounce is not confirmed until the S&P 500 is able to comfortably hold above 2,795-85.

Bottoming is a process, and last Friday’s close for major indices was generally positive. Look for the S&P 500 > 2,795-85, ACWI > $70.80, Nasdaq > 7,505 and TSX > 15,474 to confirm markets likely bounce this week.

chart 1

Major Index Direct Price Regression

When humans move very far away from “normal” routines they tend to come back “home.” In markets, we call this “mean reversion.”

The channels to the right are direct closing prices day over day, enveloped in 2-standard deviation channels (“home” is the middle of the channel).

Last week, all major market indices moved to the ~2 standard ceviations+ or cheap side of annual routines. Current presentation of this tool suggests that equities have a higher probability to bounce in the week ahead.

chart 2

Trading Bloc Positioning

This chart compares major Trading Blocs back to the entire global equity market (ACWI), to determine which spaces are relatively cheaper or relatively expensive.

Why? Capital-flows usually tilt towards relatively cheaper spaces, but a catalyst must be present.

Currently, the S&P 500, Dow, Japan, Brazil and Russia present as expensive while all else is on the relatively cheaper side of annual routines with the Globe (ACWI). If a global macro market swing-low formation takes hold early in the week, there is a higher probability for a stronger bounce in all the spaces on this chart except those mentioned above as expensive.

We note from a longer-term perspective (10 years+) that the Nasdaq (IXIC), Dow (DJI), Brazil, Russia and Japan are too expensive to consider playing a bounce and holding positions longer-term.

chart 3

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