The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Year-to-date performance
- Weekly summary.
- Update on market positioning.
- Stock market forecast.
- Capital markets update.
1. Year-to-date performance
We use two long-only cross-sectional momentum strategies to generate signals for capital markets and factor ETFs. See Section 3 below for open positions and signal updates.
Year-to-date, the weekly strategies are up 26% (equal allocation, no leverage) versus a gain of 24.4% for the SPY ETF. Gold (GLD) is up 23.8% year-to-date. Tech stocks (QQQ) have gained 21.8%. The US dollar index (UUP) is up 11%, and long-duration bonds (TLT) are down 5.9%.
Despite the high correlation between the ensemble (weekly report) of the two momentum strategies and the stock market (SPY), a few brief periods of outperformance account for the higher return. The strategy’s beta over the last 10 years is about 0.45.
2. Weekly Summary (November 11–November 15, 2024)
- Stocks fell as traders took profits from the recent election trade, and economic data lowered the probability of an aggressive rate cut cycle.
- Large-cap stocks (SPY) fell 2.1% to erase about 50% of the election rally gains.
- Gold (GLD) plunged 4.8% due to a rally in the US dollar.
- Long-duration bonds (TLT) fell 2.6% after reports showed an uptick in inflation.
- Commodities (DBC) fell 3% due to a sell-off in energy, grains, and precious metals.
- The US dollar index (UUP) rally continued with a weekly gain of 1.9%.
- Since January 3, 2022, bonds (TLT) have been down 33.5%, while gold and large-caps (SPY) have gained 38.4% and 28.4%, respectively.
- For the week, the equally weighted magnificent seven stocks index fell 2.7% after surging 8% a week ago. TSLA fell the least by 0.2%, and META fell the most by 6%.
- This week’s performance of market sectors was mixed. Health care (XLV) plunged by 5.6%. Financials (XLF) gained 1.4%.
- Year-to-date, financials (XLF) are up the most, by 34.1%, while health care (XLV) has risen the least, by 5.1% and is in oversold territory.
Reality Sinks In
Last week, we wrote:
We believe that after the euphoria, reality will “sink in,” and investors will start scrutinizing every potential move and change in policy. Therefore, there are high odds of increasing uncertainty and volatility early next year.
Uncertainty and volatility increased sooner than we thought, also due to the latest numbers showing an uptick in inflation. There are now more frequent references to a possible “stagflation” scenario, which, despite its low probability, is a rather ominous and extremely difficult economic state to navigate. But in an environment of exponentially rising public debt, everything is possible.
On the other hand, corporations’ balance sheets are solid, and credit spreads have decreased significantly.
Top chart: AAA corporate bond (black) and 10-year note yields. Bottom chart: Spread (black) and S&P 500 (blue, axis not shown).
The spread between corporate AAA bonds and the 10-year Note has remained tight since 2023, mainly due to rising Treasury bond yields. On financial social media and blogosphere, there are all sorts of credit spreads that start around 2000 and point to a drop to pre-GFC levels. However, long-term charts show that similar levels or even negative spreads were present during the high inflation period of the 1980s and then in the mid-1990s, while the stock market gained. What is different this time is the skyrocketing public debt due to deficit spending. The strength of the US dollar shows that investors, especially foreigners, are willing to finance the deficits and are buying US assets. For how long this will last is unknown and will also depend on policies implemented by the new administration. High tariffs may benefit the US dollar and, by extension, US assets, but at some point they could trigger higher-order effects with unpredictable outcomes.
Since 2022, the US dollar index has outperformed the EEM ETF, and large-cap stocks (SPY) have outperformed the latter by an order of magnitude.
Relative performance year-to-date (top) and since 2022 (bottom)
Year-to-date, the SPY ETF is up 24.4% versus 7.5% for the EEM ETF, 5.3% for the US dollar index, and -5.9% for the TLT ETF. The average 252-day correlation between EEM and UUP ETFs is negative and has remained highly negative for extended periods of time, as shown below. Correlations are dynamic, and investors should be careful when using them for allocation purposes.
0-lag, 252-day correlation of returns of UUP and EEM ETFs
As we have argued in other reports, investing in emerging markets (EEM) is equivalent to a short US dollar (UUP) position on average. Therefore, the conclusion is that as long as the US dollar remains strong, US risk assets (SPY) will rise, bonds (TLT) will fall due to deficit spending, and emerging markets (EEM) will consolidate. Given that geopolitics, particularly the BRICS movement, and the use of gold for hedging, further investigation is necessary. Gold (GLD) has had a spectacular run since 2022, and year-to-date its performance matches closely that of large-caps (SPY) even after the recent sell-off.
Putting it all together
This excerpt from a recent blog article summarizes it best:
Markets are non-stationary, and the big picture constantly changes. Understanding the big picture is a daunting, if not impossible, task, yet this futile exercise is appealing to many traders and investors.
Given the uncertainty and the complexity, what matters is the market positioning and whether there is a well-defined and preferably systematic process for achieving reasonable risk-adjusted returns. Trying to understand the “big picture” is a futile exercise. Market analysis is appealing, but after a certain point it turns into a narrative that may entail high risk.
In these weekly reports, we use two cross-sectional momentum long-only strategies that generate signals for capital markets and factor ETFs, as well as a forecasting model for use with large caps (SPY).
3. Update on market positioning
The most recent update occurred on Friday, November 15, 2024, following the close of the market. The year-to-date, equally weighted performance is 26%. Below are the open positions and new signals.
|
This post is for paid subscribers
Already a subscriber? Sign in |
Premium Content
By subscribing, you have immediate access to hundreds of articles. Premium Articles subscribers have immediate access to more than two hundred articles, and All in One subscribers have access to all premium articles, books, and market signal content.
Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: The Weekly Market Reports are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the Weekly Market Reports. Under no circumstances should the Weekly Market Reports be treated as financial advice. The author of this website is not a registered financial adviser. Before subscribing, please read our Disclaimer and Terms and Conditions.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
If you found this article interesting, you may follow this blog via RSS, email, or Twitter.
