Still Standing — Evening Brief – 08.13.24
The increased market volatility over the last few weeks of trading has raised the alarm about whether the markets are about to enter a protracted risk-off environment.
However, looking at the trend through the prism of US equities implies that it is too early to pronounce the bull run over. The S&P 500 Index has fallen from a record high established in the middle of July, but the correction is currently considered “normal”. Meanwhile, the S&P’s 50-day average remains significantly higher than its 200-day average, indicating that a bullish trend bias persists.
Bear markets tend to weed out “weak hands,” wipe out individual investors, and punish those who utilize too much leverage. Another important function of bear markets is to transfer leadership from one country, industry, or asset class to another. This leads us to now. Is the present downturn an opportunity to buy more of these assets on the cheap, or is it time for investors to hunt for new stories?
One answer can be provided by several ETF ratios. To start, a relative analysis of U.S. equities, using the SPDR S&P 500 ETF Trust (SPY), versus a low-volatility ETF such as the S&P 500 Low Volatility ETF (SPLV), for example, reveals a bull trend that has been kicked but not necessarily knocked down. The same holds for the high-flying corner of semiconductor stocks, using the SMH relative to the SPY.
From another angle, consider how the defensive utilities sector (XLU) stacks against the entire stock market (SPY) on determining whether market sentiment has truly altered. This ratio tends to rise when a safe-haven bias prevails. Although there has been some progress in that direction, it is unclear whether a long-term shift is happening.
Conversely, the ratio of long-term Treasuries based on the iShares 20+ Year Treasury Bond ETF (TLT) relative to shorter-term counterparts based on the iShares Short Treasury Bond ETF (SHY) shows a more advanced change in market sentiment.
If this ratio is increasing higher, it indicates that investors are becoming more willing to hold investments with longer maturities. This is generally correlated with increased confidence in the profitability of “going long” trades, which is driven by expectations of impending macroeconomic problems. Considering this, the most recent increase in the TLT:SHY ratio merits careful observation.
Likewise, pay attention to the US stock-bond ratio (SPY:BND). The recent decline of this risk-on/risk-off sentiment index is concerning. However, as of right now, the 50-day and 200-day moving averages are the only ones where the trend has wavered.