October 2021 System Quality Number® Report The SQN® 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 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, however, the figures for all of the ETFs in the model are relative to the US Dollar. At the end of October, the US Dollar ETF (UUP) is the only bullish currency with a Market SQN score of 1.32, which makes everything look more bearish.

Let’s start from the left of the table in the Asia Pacific region. Asia was looking weak last month and now everything is brown or red except for India which is bullish. I have no idea why India is so strong. Japan, Singapore, and Taiwan are neutral while China, Hong Kong, South Korea, and Thailand are all strong bear.

In US equities, the NASDAQ, S&P 500, and mid-cap growth (IJK) are green. Large-cap value, mid-cap blended, and small-cap growth (DIA, MDY, and IJT) are neutral market segments. Every other market segment is slightly bearish. Obviously, the pattern here is large caps (top row) and growth stocks (right-hand column) are stronger while value and small caps are weaker.

The other countries located in the Americas stock markets are weak. Canada and Argentina are neutral while everything else is bearish. Brazil is now the weakest at -1.57.

Like the other regions, Europe has one bullish country – Russia (sort of Europe), and seven more neutral countries. The rest of the countries in Europe are slightly bearish. As a whole, Europe doesn’t look that bad but their fiat currency, the Euro, has the worst score currently among currencies we follow.

When we look at Forex, the US Dollar is the only bullish fiat currency and the only neutral fiat currency is the Yuan. Everything else is bearish with the worst being the Euro at -1.75.

In the most talked-about sectors, BTC and Robots and AI are bullish with BTC being the strongest. AI and 5G are neutral and everything else is strong bear. I guess the market does not see marijuana being legalized in the US anytime soon. MJ is by far the worst sector in this group even though Mexico and Canada have legalized marijuana. The US will probably not legalize it while Congress continues to fight over the infrastructure bills.

Now let’s look at the individual market sectors. Three sectors remain bullish from last month: semiconductors, technology, and software while the model added three more: consumer discretionary, health care, and broker-dealers. We have 16 neutral sectors and 13 bearish sectors – of which 3 are strong bear. The weakest sectors are volatility, gaming (sorry Vegas – some casinos were almost empty during the week I was there in September), and marijuana.

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

Commodities are quite mixed. Natural Gas, Oil, Commodities, and Global Water are all bullish. Base metals, agriculture, and global agribusiness are neutral and the rest are bearish. The traditional hedge against bad times, gold, is bearish and silver is strong bear – actually the weakest commodity right now. The coal ETF (KOL) is no longer listed. Sen Manchin (West Virginia) might be able to stop a lot of the climate control infrastructure legislation but he can’t protect coal.

Two of our real estate sectors are no longer listed and the other two are both bearish.

Long-term bonds are neutral, TIPS are bullish, while the shorter-term bonds are generally more bearish with the shorter the term.

Among the strongest ETFs this month are growth-related ETFs (IVW, IWY, SCHG, VUG). Technology and medicine are also strong. All 15 of the strongest issues in the model are strong bull and all 15 of the weakest are strong bear.

The weakest ETFs seem to include emerging markets (most of whom cannot even get their people vaccinated against COVID 19). Other weak ETFs include those mentioned such as MJ, the Euro, US Dollar bearish, Brazil, and Pakistan.

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.

I have been tracking monthly data since January of 2015 but I decided to only list quarterly data for years further back than 2019. If a record month (seen highlighted in the table below) happened outside of the quarter end, however, then I retained that month in the table. If you wish to see all of the data, you can look at the August 2021 issue.

The summary numbers tend to suggest that the database is about the same as last month, even though the S&P 500 is much stronger now than it was last month. Nearly half of the symbols in the database score in the sideways category.

Until next month, 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.

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