Archive for the ‘market conditons’ Category

Bloomberg Declared Emerging Markets In Bull Status — Maybe That’s Just Bull

Saturday, March 19th, 2016

(this is our letter to clients 2016-03-18)

QVM Clients,

Today, a Bloomberg TV announcer said emerging markets are now in a Bull phase. Don’t get overly excited by that call. I know why they said that, but question the utility of their definition.

Vanguard’s emerging markets ETF, for example, closed at $34,40, up 11.2% from is multi-year closing low of $30.74; and up 22.9% from its multi-year low intra-day price. The former is not a Bull, and the latter, even if that is a reasonable way to measure, is not a Bull in the overall price history of the ETF.

It is well accepted that a 20% decline from a high is a Bear; but it is less well accepted that a 20% rise from a bottom is a Bull. However, let’s consider some hypothetical extremes first.

Let’s say a $100 stock grinds down to $10 within 12-months or less. If that stock rose to $12 (up 20%), Bloomberg would have to call that a Bull, even though it was 88% below its high.

That contrasts greatly to a $100 stock that declines to $80 (the Bear threshold) and then climbs to $96 (a 20% rise). Maybe that is a Bull.

Some other qualitative factor needs to be present, in my view, to call a Bull after a Bear.

That, to me, involves at a minimum bringing the trend line into the picture, if not the relationship of the price to the trend line.

If that $100 stock that went to $10 and stayed there for a year, and then went to $12 – now maybe that is a Bull – because by then the trend line would be in the vicinity of $10 and the rise to $12 becomes more meaningful.

So now let’s look at Vanguard’s emerging markets ETF to see if a Bull is realistic.

Here is simple monthly chart (where the last price bar is month-to-date) over many years. Visually, without any technical aids, it is hard to think of the March price action as a return to Bull status.

(click images to enlarge)


Here is 14 month chart. OK, maybe the last price bar looks like a big improvement, because it is above the trend of the closes, as you can visualize without aids.


Now let’s look at it through the lens of some technical filters. Without even explaining all the extra plots on the chart, it starts to look a lot less appetizing, and not so Bullish.


Emerging markets may pose a trading opportunity, perhaps the recent rise will continue and become what we would accept as a Bull, but for now it is at best a counter-trend rally in a downward market. And, none of that considers the terrible constitutional crisis and economic problems in Brazil, or the sanctions against Russia, or the challenges in China to get past their real estate bubble and extend-and-pretend their bank loan portfolios, or the continual capital flight from those nations.

Let’s consider this last chart and see how it tells us emerging markets are not in a Bull state.

The top panel is our net market condition and phased tactical allocation modulation rating, on a scale from 0 to 100, based on four factors:

  • The direction of the primary trend line (the gold line)
  • The price relative to the trend line
  • The changes in price relative to volume – supply/demand (dashed green line versus 50 level on left scale)
  • The price relative to a time based performance test (price vs dotted red line)

We give half of the weight to the direction of the trend line, and one sixth of the weight to each of the other three factors, to arrive at the overall market condition rating shown in bold black in the upper panel.

You can see that:

  • The trend direction is down (Bearish)
  • The price is below the trend line (Bearish)
  • The demand/supply ratio is under 50 (Bearish)
  • The price is below the time & performance threshold (Bearish)

Buying into emerging markets at this point is a speculative approach. Not wrong, but speculative; and should not be done on the basis of an off the top of the head TV declaration of a Bull without a more in-depth look at the total price behavior picture.

A lower risk way to enter emerging markets or any other market is to do it in stages. One way to move in stages would be to modulate exposure to each risk category based on a variable indicator of the trend strength of each category. We posit that our 4 factor tool is one reasonable tool for guiding a staged shift of allocation within a category, relative to your long-term policy allocation for each category.

In closing, here are the market condition ratings using the same tool for the leading S&P 500 ETF, its 9 sector ETFs; the soon to be declared 11th sector ETF (for real estate equities) and the stock ETFs for the world excluding the US, emerging markets, and China (the largest component county weight within the emerging markets index):

  •    17 – S&P 500 (SPY)
  •    17 – Materials (XLB)
  •     0 – Energy (XLE)
  •     0 – Financials (XLF)
  •   80 – Industrials (XLI)
  • 100 – Technology (XLK)
  • 100 – Consumer Staples (XLP)
  • 100 – Utilities (XLU)
  •    17 – Health Care (XLV)
  • 100 – Consumer Cyclicals (XLY)
  •   80 – Equity REITS (VNQ)
  •      0 – World excluding US (VEU)
  •      0 – Emerging Markets (VWO)
  •      0 – China (GXC)

These are trend following ratings, not based on any other technical parameter. They are not fundamental ratings or valuation ratings or thematic ratings. These are purely and simply statements of the status of the trend at this time. To the extent that most of the time (but not all of the time) the near-term future resembles the short-term past, these trend ratings may be predictive. However, they do not make suggestions about long periods of time. They are tactical ratings for allocation shifting within and around long-term policy allocation levels for each asset category.

For example, when you look at the S&P 500 and its sector ETFs through a valuation filter using the PEG ratio (P/E ratio divided by estimated 5-year earnings growth rate), as a measure of GARP (growth at a reasonable price), you get a different picture (where lower is better, and more than 2 is expensive):

  • 1.98 – S&P 500 (SPY)
  • 3.18 – Materials (XLB)
  • NMF – Energy (XLE)
  • 1.68 – Financials (XLF)
  • 1.64 – Industrials (XLI)
  • 1.37 – Technology (XLK)
  • 2.53 – Consumer Staples (XLP)
  • 3.86 – Utilities (XLU)
  • 1.97 – Health Care (XLV)
  • 1.20 – Consumer Cyclicals (XLY)

If you consider trend status and the cost of growth together, Industrials, Technology, and Consumer Cyclicals look like the best current bets. We will likely add exposure in these areas.   Utilities and Telecom (not available in an S&P 500 sector ETF) are both expensive in PEG terms, but are trending nicely. As yield oriented sectors, they are expected to suffer when interest rates rise.

Investors can make other arguments for other sectors based on fundamental, valuation or themes. For example, Energy pops out as a recovery story when oil prices i; and Financials are expected to do well when interest rates begin to rise.

We will look at and write to you about some related breadth data and valuation data for US indexes, sectors and industries in the next several days.

In the meantime, don’t take TV host analysis of emerging markets as in a Bull market totally on board, without considering the information in this note.

Compare Breadth: Europe, Japan, USA, China And India

Wednesday, January 27th, 2016


Back in December, many institutions recommended over-weighting Europe, and some preferred Japan.  They may still feel so, but at this time the internals for the key European and Japanese stock indexes are just a lousy as for the S&P 500.

(click images to enlarge)



Europe’s STOXX 600  has the highest portion of stocks within 2% of their trailing 1-year high at 4.03%, but that is not good.  Japan’s NIKKEI 225 is near zero at 0.45%.  The S&P 500 is between Europe and Japan at 2.01%

The percentage of constituents of the STOXX in a 10% Correction or worse is 78.49%; Japan 91.96% and the USA 80.48%.  Those are very bad numbers

The percentage of constituents of the STOXX in a 20% Bear or worse is 57.31%; Japan 62.95%; and the USA 58.15%. Those are very, very bad numbers.

You can see from the table image that the depth of the problem is not evident in the price performance of the indexes themselves, which are market-cap weighted and dominated by a small number of mega-cap members.

The median STOXX member is 23.46% off its high, while the index is only off 17.83%.  Both are bad numbers, but the median stock is about 6% farther from its high than the index is from its high.

Japan and the US show even greater divergences.  While all three indexes have similar median stock positions relative to their trailing highs, Japan’s median stock is about 10% off its high more than the NIKKEI; and the S&P 500 median stock is about 11.5% farther off than the index.

Only about 20% to 25% of the constituents of those three indexes have 200-day indexes with the tip pointing up (75% to 80% have tips pointing down).  The direction of the tip of the trend line is an important thing, as it takes a lot of force to make it change direction from positive to negative, or from negative to positive.

The percentage of members of those indexes that have prices above their 200-day averages is similar to the percentages with trend line tips pointing up.

We defined “rising” as a condition where both the tip of the trend line is pointing up AND the price is above the trend line.  Based on that arbitrary definition only 12% to 16% of members of the three indexes are “rising”.

Looking at the very short-term (the percentage of constituent stocks with prices above their 10-day moving average), the data are bit more encouraging (STOXX 63%, NIKKEI 70%, S&P500 50%).E


India is favored over China by many analysts, and this internal breadth data agrees with the point of view, at least in terms of the current condition of their respective markets.


This chart looks at the combined Shanghai and Shenzhen for China; and at the SENSEX for India.

While they both have over 90% of their constituents in Correction territory or worse condition (China worse at 98% and India better at 91%); India is much better off than China when it comes to the percentage of constituents in a 20% or worse Bear market (76% for India versus 96% for China).

Only 15% of Chinese stocks are above their 200-day average, while 50% of Indian stocks are above.

Using our definition of “rising”, only 15% of Chinese stocks are rising (similar to Europe, Japan and the USA), but 46% of Indian stocks are rising.

This is not a recommendation to invest in India, but it does appear that India is mending faster than China.


  • STXX (STOXX 600)
  • EWJ (NIKKEI 225)
  • SPY (S&P 500)
  • GXC (China)
  • INDA (India)