The ETF Portfolio Strategist: Saturday, May 22


It was a mixed week for markets as US stocks continue to dip. There was more meandering that trending this week, but in some corners the fading of the bullish sentiment appears to be gathering strength.

Take this week’s top performer for our global 16-fund opportunity set (a proxy for the world’s major asset classes): equities in Japan. The iShares MSCI Japan ETF (EWJ) led the gainers with a 1.4% weekly advance through today’s close (May 21). Nice, but the rally doesn’t look convincing as recent history suggests the fund is rolling over after a potent rally off of last year’s low. Indeed, EWJ’s momentum ranking (MOM column in table above) remains at 50, which is the midway mark between bearish and bullish biases. Perhaps tipping the scale to darker side in the weeks ahead is today’s news via PMI survey data that shows Japan’s economy slipped back into contraction this month. For details on all the strategy rules and risk metrics, see this summary.

US shares look firmer, although Vanguard Total US Stock Market (VTI) retreated for a second week, slipping 0.3%. But in contrast with EWJ, VTI’s MOM score remains at a red-hot 100 — the strongest bullish print — and so it’s not yet obvious that American stocks are due for an extended correction.

Meanwhile, the 10-year Treasury yield continues to tread water and was unchanged for the week at 1.63%. Inflation may be on track to run hotter, or so we’ve heard. But for now, the bond market’s done pricing in that risk beyond the back-up in rates that’s already baked in.

The flatlining for rates translated to similar behavior for iShares 7-10 Year Treasury Bond (IEF), which ticked up this week but continues to trade in tight range.

This week’s biggest decline: iShares Latin America 40 (ILF), which fell 1.8%. Despite the setback, the fund still appears to be trending higher and ILF’s strong 90 score for MOM doesn’t suggest otherwise.

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Disclosures: None.

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