(A portion of this posting was adapted for my weekly piece at ETFG.com which can be found here)
It’s a shame that investors often have such limited memories, not just when it comes to recent events but to the wisdom of that can be gleamed from some of the investing greats. For those investors who are looking to outperform, either in 2015 or beyond, they should consider one of Sir John Templeton’s famous quotes: “People are always asking me where the outlook is good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?”
Starting here at home, Friday’s Employment Report seems to have knocked the nascent “Evans Rally” off its track as a better than anticipated report has been interpreted as binding the Fed’s hands over a potential 2015 rate hike. The upcoming week is fairly light here in the U.S until Friday’s CPI report, which means that now is a good time to take a baseline on equity sentiment. We spoke last week about which equities outperformed/underperformed during the short-lived rally on Wednesday and Thursday; a quiet week should let us see how confident investors are feeling so far here at home. While it’s tempting to say that there might be more value in U.S. equities, the Yinzer Analyst would recommend caution before jumping in with both feet.
Looking at the daily charts, the S&P 500 has been stuck in a rising wedge pattern while negative divergences have been forming with weaker momentum scores and reduced buying pressure. The S&P 500 may continue advancing but the new “highs” should be watched carefully, rules that have been in place since the S&P 500 fell out of the uptrend channel that formed back in late 2012.
Looking out longer term on a monthly basis, the uptrend that began on the back of the Fed’s commitment to QE in 2011 has been broken yet again. Unless that S&P can close above the line, close to 2100, before the end of the month, investors should start preparing for a new period of prolonged weakness. Not necessarily a sharp correction, but an extended consolidation.
The crisis of faith in domestic equities, not to mention concerns over a European QE and declining inflation, has continued to spillover towards U.S. treasuries. Both the ten and thirty year yields have broken through their 2014 downtrend channels.
The biggest winner so far in this global crisis of faith are the gold miners. Repeating a familiar pattern from early 2014 when investors were concerned about an early end to QE3, the miners again have benefited from their traditional role as the traditional safe haven during periods of equity weakness.
Now at the risk of repeating myself, the Yinzer Analyst still feels that the epicenter for global risk isn’t in the emerging markets but in Europe. Since making a new high on June 6th, the iShares MSCI EMU Index ETF (EZU) has declined over 17.78% compared to an 11.65% loss for the broader iShares MSCI EAFE Fund (EFA) while the Currency Shares Euro Trust has dropped 13.5% in the same period and back to levels not seen since late 2005. The 2012 playbook continues to be followed close to the letter with another potential Greek exit from the Eurozone looming with the Global X FTSE Greek ETF (GREK) down over 47% since June 6th, even outpacing the disastrous showing by the Market Vectors Russia ETF (RSX) down 38.73% in the same time period while several ETF’s linked to Northern European Union member states as well as unaffiliated European nations have seen better (less negative) performance. But have investors taken their case too far?
First let’s consider the technical case before moving to fundamentals. While we’ve advocated European equities almost since the beginning of this blog, we’ve also pushed caution on purchases and so far haven’t been disappointed by it. On a daily basis, EZU has seen a recent improvement in its CMF score as the days of heavy selling from early December fall off and reveal the lack of further selling pressure.
On a weekly basis, EZU the PPO has been, if not improving then at least not getting worse while the CMF score again improved from the dropping off of the dismal summer weeks. To earn our support, EZU needs to close above $35.50 and then make a successful challenge of its summer downtrend line.
When it comes to the fundamental case, Gavyn Davies outlined in the January 7th FT that the next few weeks could be critical to the success of failure of the great EU project beginning with a potential opinion from the European Court of Justice on Germany’s challenge to the ECB’s “Outright Monetary Transaction” program, begun in 2012 as part of his “promise anything” campaign that has yet to be used. Davies notes that, spoiler alert, the Court of Justice has shown an inclination towards favoring programs that reinforce European integration, but even then Germany will only take their opinion under advisement. Next is a potential QE announcement from the ECB on January 22nd as low inflation becoming deflation seems to be giving the ECB the cover necessary to start a QE-like program. Finally there’s yet another round of Greek drama on January 25th.
For those truly brave investors who are willing to bear more risk than most, shifting your focus to the Global X FTSE Greece 20 ETF (GREK.) Concerns over the future of the EU project had already led to a punishing six months for the Currency Shares Euro Trust (FXE), now back to 2005 levels while the political situation in Greece seems to only go from bad to worse. In 2012 it was a challenge from the far-right with Golden Dawn, in 2014 the threat to the status quo is coming from the far-left where the Syriza party led by Alexis Tsipras seems poised for victory on a platform built around the need to write-down existing debts while alleviating the on-going fiscal austerity that has been mandated as part of the ECB/IMF led bailout. Polls at the start of January showed Syriza with a commanding lead and have sparked reports that Germany is quietly preparing for a Greek exit from the EU. With that backdrop of more uncertainty after the election and a possible “Grexit”, is it any wonder that the only Greek-related ETF available to U.S. investors, with a 30% allocation to Greece’s largest banks, is now trading at a P/B ratio of .41 according to parent Global X? Investors are clearly prepared for the worst.
With that, I’ll leave you to consider your portfolio’s, your positioning for 2015 but most importantly to consider just how much risk you’re willing to take going forward.