Non-Trade Day ETF Rankings and Market Commentary

This week’s ETF Rankings and Market Commentary are provided below. Be sure to read the Market Commentary to understand what appears to me to be a very dangerous time in markets.

Non-Trade Day ETF Rankings

The rankings as of closing prices on August 18 are provided below. They are presented in the usual format:

August 18, 2017 (Non-Trade Day)

As explained in last week’s post on rankings, the method used to measure momentum is not short-term. Thus, changes in rankings from week to week are not as dramatic as the changes in weekly performance might be.

Even though momentum rankings use a longer time frame than one week (actually more than one month’s data are used in the complex calculations), rapid changes can be seen in the above table. The color coding is an aid to spot the big changes.

The best momentum rankings are shown in shades of green (changing from dark green to light green). The ordered ranking of the WkBk0 column (the current rankings) clearly shows the change in colorization as the ranking declines. Looking across the columns (WkBk0 to WkBk4), the color changes stand out. To illustrate, two weeks ago there were four of the lowest ranked ETFs that moved into the top 25 in the current week. Similarly, eight of the lowest ranked ETFs three weeks ago now appear in the top 25 and two of these (GLD and RWX) currently have moved into the top 7.

To illustrate the lag in rankings, it can be helpful to rank ETFs by weekly returns. The next section does that.

ETF Returns Ranked by Last 2-Week Returns

The table below shows ETF returns sorted in order of best to worst for the latest 2-week period. Also shown are returns for this week and longer periods:

The positive performances for the two week period are all commodities or safety ETFs (bond or utility funds) except for RSX.

Of the top five performers, four of them were losers for the last 26 weeks. This kind of shift is indicative of shifting market leaders. The momentum rankings show three of these bond funds and GLD in the latest top 12 rankings.

It should be noted here that the momentum rankings are not sensitive to short-term movements. That is, they are designed for momentum longer than two weeks so as to not pick up lots of noise. A version of the momentum rankings which are more sensitive to shorter term movement is under way. It will not replace the current rankings but will supplement them for traders who prefer to trade more frequently. As envisioned, these new rankings would likely be traded every two weeks rather than once monthly.

Market Commentary

The state of the world, domestic and international, coupled with over-valuations in all financial assets, make this a particularly dangerous time for investors. As stated in a previous article, these are not normal times or markets. A buy and hold strategy is potentially a serious threat to your wealth.

The domestic and international situations are unstable and unlikely to hold together much longer. With stocks so overvalued, the risks are too high to have capital committed that is not watched closely.

Domestic Concerns

There has been a serious increase in domestic concerns:

1. The incident in Charlottesville, whether planned or not, raises tensions. To me, it seems like a planned event rather than a spontaneous one. That does not make it any less dangerous. If so, it likely means there will be follow-on similar disturbances.
2. If you believe the media, Donald Trump is losing control of himself and his White House entourage. Of course that is what they would like you to believe whether it is true or not. At this point the media has little credibility. Yet, like the boy who called wolf too often, will we know when to believe them in the event something is truly worth worrying about?
3. The Atlanta Fed has an optimistic expectation regarding this coming quarter’s GDP numbers, an exception to the general domestic fears although one that could easily be overrun by the negatives.
4. At least as troubling as everything else is the inability of politics to work. Many Republicans seem to believe that they are better abandoning Trump than standing by him. While future elections may provide evidence supporting or refuting that position, it appears to seriously damage expectations for healthcare or tax reform.

Expectations under a Trump presidency drove markets to extreme heights. If these, as suggested in item number 4, disappear there could be a massive decline in markets.

To understand how overvalued stocks are, see the following from Zerohedge:

The S&P 500 Is Now Overvalued On 18 Of 20 Valuation Metrics

After last week’s brief war with North Korean-inspired volatility explosion (and just as rapid subsequent retracement), some have asked if the resulting market decline, which is down a further 1% on today’s latest terrorist attack in Spain, has made stocks more attractive. Here is the quick answer according to Bank of America: based on the 20 most widely used valuation metrics, the S&P remains substantially overvalued on 18 of 20 valuation metrics, the only exceptions being free cash flow, helped by depressed capex), and relative to bonds  – the Fed’s favorite indicator which got a shout out in yesterday’s FOMC minutes –  where yields remain depressed thanks to $18 trillion in global central bank purchases.

Read more of this article here.

International Concerns

Korea seems to have taken a backseat for a while. Yet a major terrorist attack in Spain just occurred. China, Russia and Iran are all wildcards ready to exploit whatever opportunity they sense. Furthermore, it doesn’t appear that US allies like Trump anymore than the US politicians. Very volatile situation(s) and impossible to predict when or if they erupt.

Conclusion

My take is that this market is about to reverse and do so big time. Of course that is merely an opinion subject to the vagaries of events. It just seems that the probabilities of negative events is greater than positive ones and that calculus is more lopsided than I can remember. The fact that financial assets appear so overvalued only reinforces the need for caution.

If you are following the ETF momentum rankings, it might not be bad to cut your exposure in half and use protective stops on all your positions. Precious metals, while not reaching the highest momentum rankings, have been performing well recently. They may be a reasonable hedge in these risk times.