If the bullish scenario plays out this week, flows are likely to be tilted more so to North America and International Developed Markets (EFA) vs. Emerging Markets, says Ziad Jasani in commentary and video here.

However, if the bearish scenario plays out, we are likely to see Emerging Markets (EEM) significantly underperform North America and International Developed Markets.

video

View my weekly strategy session video here.
Recorded: Dec. 10, 2018.
Duration: 1:37:07.

chart 1

Global Risk Sentiment

Looking at the third column to the right in the chart above 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.”

We ended last week with price signals leaving us on the edge of a cliff.

And 2018 has played out as one big consolidation/topping pattern for North American markets and we closed near the bottom of said pattern.

While the proverbial floor holds, juxtaposed to the “reversal-setup” for Defensives to under-perform, we remain optimistic. Yet,  we must see Treasury yields provide a relief-bounce, Oil to follow with bounce, and Cyclical/Growth-Based Equity spaces/sectors in North America to bounce up from their bottoming patterns, before we can transact a swing low.

The polarizing signal provided by our Global Risk Ladder suggests we see a minidump then a risk-on-pump; our focus for acquisition would be: SPHB, KBE, QQQ, FEZ, IWM, IYT, EWC, SPY, USO.

chart 2

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).

Most major equity indices/trading blocs are testing the lower limits of annual 2 standard deviation channels, implying mean reversion (a bounce) either happens this week or the proverbial bottom of the year-long consolidation pattern North American Markets have traversed breaks.

The weak link has been North American Growth-based spaces, and any bounce must be led by Growth, but is likely to be short-lived.

chart 1

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 bullish scenario plays out this week, flows are likely to be tilted more so to North America and International Developed Markets (EFA) vs. Emerging Markets.

However, if the bearish scenario plays out, we are likely to see Emerging Markets (EEM) significantly underperform North America and International Developed Markets.

Targets for acquisition in the bullish scenario: SPY, IWM, QQQ, DIA, XIC-T, EWC, EWG, FEZ, EWU, EFA.

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