Where are the higher-risk asset classes? Which spaces are cheaper in the global equities market? How to confirm a bounce this week, writes Ziad Jasani Monday from Toronto with a video..
View my weekly strategy session video here.
Recorded: Nov. 2, 2018.
Duration: 2:06:14.
Global Risk Sentiment
Looking at the third column to the right 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 weak Risk-On signal, as Defensives remain polarizingly expensive while Higher-Risk Asset Classes remain relatively cheap and oversold.
Our market modelling suggests a better chance for the bounce for equities to continue this week; wherein we will be focused on accumulating: SPHB, QQQ, FEZ, IWM, RSP, EEM, EFA.
We note that the bounce is fragile and requires the S&P 500 to get and hold above 2,737. Bottoming is a process, and last Friday’s close did not kill the bounce but did force positions to be stopped out (with profit).
To confirm a continuation, look for the S&P 500 > 2,737, ACWI > $69.95, Nasdaq > 7,320, Russell2K > 1,560, Dow > 25,373 and TSX > 15.175 to confirm markets likely bounce this week.
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 stayed ~2 standard deviations+ on the cheap side of annual routines (ex-EEM).
Current presentation of this tool suggests that equities that still have a higher probability to bounce in the week ahead.
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.
If the global macro-market swing-low formation continues early in the week, there is a higher probability for a stronger bounce in the following spaces: IWM, QQQ, EWC, XIC-T, EPI, EWU, EFA, FEZ, EWG, EEM.
We note from a longer-term perspective (10 years+) that the Nasdaq, Dow, Brazil, and Russia are too expensive to consider playing a bounce as a way of building and holding longer-term positions, only short-term bounces.
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