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 an index-based 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.
See below for a table that covers the equity markets across the globe. It’s now mostly green in the Americas and Europe but Asia is starting to look weak. In the Americas, the US and Canada are all green but Central and South American countries have moved to neutral. Everything in Europe is bullish except Poland and Spain (both neutral). In Asia, however, only Taiwan, Australia, Hong Kong, and Singapore are green. Everything else is neutral except Malaysia which is bearish.
The most important ETF in the model is the US Dollar (UUP) – which is still neutral. The USD index is down from a high of 103 in March 2020 to about 91 now. That’s a pretty big drop. But since UUP is no longer one of the worst-performing ETFs we track, the overall big picture has moved more neutral. It might have nothing to do with the overall market and everything to do with the fact that we measure everything in terms of the US Dollar. And now gold, usually a hedge for times like these, is the only bearish commodity. Nevertheless, if you measure your wealth in US Dollars, then we’d suggest that you take steps to protect your portfolio.
In the US market sectors, there are only two bear sectors, volatility, and biotech. There are only eight neutral sectors, the same as last month – consumer discretionary, pharmaceutical, semiconductors, technology, 5G, AI, and software. Utilities are now bullish again as is everything else. The strongest sectors are broker-dealers (the market is booming), food and beverage, basic materials, home building, industrial, REITs, insurance, regional banks, and the transportation Dow.
What’s really interesting is that some of the industry’s worst hit by the pandemic are now quite strong. Big recoveries are quite obvious in oil and gas, Dow transports, food and beverage, retail (all, not just online), and REITs. So big money is already anticipating a recovery from the pandemic and has moved into those sectors. In the market update, I said there would soon be a nice opportunity coming in those sectors, but I was wrong. It’s already taken off.
The only real weaknesses on the table are in the currencies which is probably due to COVID-19 spending around the world as governments try and protect economies. The Japanese Yen is the worst followed by the Swiss Franc and the Euro. The Indian Rupee ETF did not have price data and BTC is now bearish. Several currencies, however, are relatively strong – the British pound and the Canadian dollar dominate that group.
Commodities, Real Estate, Debt, and the Top and Bottom Lists
There is one bear sector in the commodities – gold. Some inflation hedge that it is stronger than fiat money. Silver and natural gas are neutral but everything else is bullish. Commodities, coal, global water, agriculture, and global agribusiness dominate the commodities area.
Real estate ETFs are bullish, but we are again missing data for a REIT ETF this month. My thought would be that real estate would be down generally but real estate is a hedge against the US dollar crashing. In addition, interest rates are still cheap so houses in my area (especially top-end houses) are up about 50% in the last two years.
In bonds, the junk ETF, inflation-protected bonds, and 1-3 year US bonds are neutral. Everything else is bearish. As I’ve said, why would you want to be in debt instruments paying less than 2-3% when the value of the US Dollar has gone down more than 10%? You can actually deposit US Dollar based stablecoins in some crypto wallets (where they need money for expansion) and earn 5-10% interest on them.
Last month I mentioned that muni bonds were dominant among the strongest ETFs. But now nothing related to them exists in the top 15. Big money is clearly moving into what they consider value – including sectors that have been depressed by the pandemic.
The top 15 areas all have Market SQN® scores above 2.26. Last month they were all above 2.12.
As I mentioned, there is a strong move into commodities right now and that means big inflation.
BTC has dropped from strong bull to bear. Grayscale didn’t manage their GBTC fund very well. By Jan 2021, accredited investors who had deposited BTC in the fund could not get out and they had such big profits that they didn’t care about a premium. As a result, GBTC now is selling at a very large discount to BTC – about minus 15%. We will replace GBTC in the model with OBTC as soon as we have enough data. GBTC’s strong relative performance compared to bearish Gold seems to indicate that institutional investors are starting to prefer BTC as a better hedge against inflation and the weakening US Dollar.
On the bottom 15 list, everything is strong bear and most involve fixed income and the Japanese Yen. That remains the same as last month.
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 –
I have highlighted the most extreme values for each column since we started this report in 2015. The overall picture of the database is slightly weaker this month compared to last month but as I said, that’s because the US dollar now shows up as neutral.
Until the June SQN report, this is Van Tharp.
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.