October 2018 System Quality Number® Report

by Van K. Tharp, PhD

There are numerous ETFs that track everything from countries, commodities, currencies and stock market indices to individual market sectors. ETFs provide a wonderfully easy way to discover what’s happening in the world markets. I apply a version of my System Quality Number® (SQN®) score to measure the relative performance of numerous markets in a world model.

The Market SQN score uses the daily percent change for input over a 100-day period. Typically, a Market SQN score over 1.47 is strongly bullish and a score below -0.7 is very weak. The following color codes help communicate the strengths and weaknesses of the ETFs in this report:

  • Dark Green: ETFs with very strong Market SQN scores > 1.47
  • Light Green: ETFs with strong Market SQN scores (0.70 to 1.47).
  • Yellow: ETFs with slightly positive Market SQN scores (0 to 0.70). These are Neutral/Sideways
  • Brown: ETFs with slightly negative Market SQN scores (0 to -0.7).
  • Red: Very weak ETFs that earn negative Market SQN scores (< -0.7).

This is basically the same rating scale that we use for the Market SQN Score in the Market Update. The world market model spreadsheet report below contains a cross-section of currently available ETFs; excluding inverse funds and leveraged funds. In short, it covers equity markets around the globe, major asset classes, equity market segments, industrial sectors, and major currencies.

World Market Summary — Equities & Currencies

Each month we look at the equities markets across the globe by segment, region, and sector. The US Dollar continued its strength in October and is the only green currency, although it’s now light green. Since everything in the database is in the US dollar, it will make foreign assets seem weaker — and that’s the way the entire chart looks. Asia, Europe, and the rest of the Americans look pretty weak, however, even US market segments are now looking weak.

In the US, there were only two green market segments two months ago. Last month everything was dark green with the exception of two light green segment. This month the entire US market segment section is red or brown with only the DOW 30 being yellow. It’s amazing to me how fast the 100 day market type can change these days.

Elsewhere in the Americas, it is not so good either. Brazil is light green, Latin America is yellow and everything else is either red or brown.

Asia is totally red with one brown sector — Thailand.

Europe is pretty much the same — all red except for Poland and Switzerland which are brown. (Poland was just added to the chart). Africa is totally red.

In currencies, the ETF for the USD (UUP) is the only green currency. The currency harvest ETF is yellow as is the Brazilian real. The Canadian Dollar and the Indian Rupee are brown while everything else is red.

In the market sectors, we have two green US sectors only – where last month, almost everything was green. The greens are consumer staples and utilities. We have several yellow areas – health care (which was very strong last month), telecom, REITS, and volatility. The brown sectors (weak) include consumer discretionary, pharmaceuticals, retail, technology aerospace and defense, food and beverage, insurance, media, networking, software and transportation DOW. The remaining sectors are all red.

Commodities, Real Estate, Debt, and the Top and Bottom Lists

Commodities were weak again in October with only natural gas (like last month) being green. Oil is yellow and commodities as a whole are brown. Livestock and global agribusiness are also brown, but everything else is red with the weakest sector being timber.

Real estate across the board looks very weak with everything being red. Interest rate ETFs are mixed with long term bonds and inflation adjusted bonds being red. Medium to long term rates are brown, while the short term bonds (under 3 years) are light green. Corporate bonds are brown while junk bonds and 3-7 year bonds are yellow.

The top 15 list only has 8 dark green ETFs and the remaining seven are light green. I have two ETFs showing Market SQN® scores greater than 5 which I have never seen before and these are both short term interest rate ETFs.

On the bottom list, the worst 15 ETFs are all red with 9 of them having scores lower than minus 2.0. The worst ETF is in global gaming and there seem to be a number of emerging market issues on the list.

Summary

Let’s look at the summary table which measures the percentage of ETFs in each of the strength categories. You can see the distribution of the database by Market SQN score in bullish, neutral and bearish categories below —

The market become quite weak in October with 81.6% of the database being bearish and only 5.6% being bullish. We have been keeping up with this data since the beginning of 2015 and this is the by far the most bearish month in that four-year period.

VTI presented five workshops in London in October and I also spent a week touring Scotland. Brexit has not yet happened as the Eurozone and Britain still have many issues to work out. I heard something in Scotland that I hadn’t considered. In a 2014 referendum, Scotland voted 55% to 45% to remain part of the United Kingdom because they were afraid they’d lose their membership in the EU as an independent nation.

Now that the British have voted to exit the EU, however, Scots are talking about wanting their independence again. Three tour guides (out of three) pointed this out. This could present all sorts of problems for both England and Scotland in the future. England has much of its defense (nuclear submarines and weapons) located in Scotland. And as most of the people in our workshop pointed out, there is no way that Scotland’s population of only 5 million can maintain any sort of decent budget.

Be careful to base your actions upon what IS happening, not what you think might happen. The markets always offer opportunities, but to capture those opportunities, you MUST know what you are doing. If you want to trade these markets, you need to approach them as a trader, not a long-term investor. We’d like to help you learn how to trade professionally because trying to navigate the markets without an education is hazardous to your wealth. All the beliefs given in this update are my own. Though I find them useful, you may not. You can only trade your own beliefs about the markets.

Until next month this is Van Tharp.

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