Market review 24.08.24

Thinking globally

Hello everyone,

I want to build on the topics discussed in the prior two blog posts.

The past month has seen elevated volatility. Observing relative strength over such periods gives us important information. The table below lists the best and worst-performing ETFs over the past month:

We can see that recent leaders are dominated by long-time laggards: emerging markets (Southeast Asia, South Africa, and select areas of Latin America) and gold miners.

Meanwhile, recent laggards are the high momentum areas since early 2023: Bitcoin miners and semiconductors.

I’ve given much attention to gold miners in recent blog posts. Today, I’ll focus on global leadership, currencies, and broader commodities.  

Going Global

During the recent market correction, tech ETFs were among the hardest hit and have yet to recover to their July highs. Meanwhile, many global ETFs weren’t hit nearly as hard before rocketing to new all-time highs. The weekly chart for EWL (Switzerland ETF) provides a great example of the latter:

The earlier table shows several Southeast Asian countries (Thailand, Philippines, Malaysia, and Indonesia) have been the biggest winners in the past month.

Last week, we also saw how the ASEA ETF made a 7-year base breakout. The rally in this ETF has been relentless in recent weeks, and it is not offering any decent pullback for an entry. I had been watching this ETF for many quarters, and it was a blunder on my part for not adding early after the breakout.

The broader Emerging Markets ETF is also bullish. Although not as strong as ASEA, EEM is climbing out of a multi-year base.

To emphasize the above breakout, I want to note that at the late 2022 lows, commercial hedgers became record-long emerging markets (link).

It’s not just emerging markets. The Developed ex-US Index is in the process of making a historic 17-year breakout! Let’s see how the rest of the month finishes.

The chart below shows the historical Forward P/E ratios for the MSCI US and World ex-US indices. Could recent strength and multi-year breakouts lead to some of this valuation gap closing in the coming years?

Select emerging markets have even lower valuations and higher growth rates than the MSCI World ex-US index.

Currencies

Global leadership is consistent with US Dollar weakness.  

The USD/EUR monthly chart confirms this. In 2022, this currency cross made an 8-year failed breakout. It’s now making a 2-year breakdown just as global ETFs are coming out of multi-year bases!

Earlier, we looked at the Switzerland ETF, which made a decisive breakout on the weekly chart. This, along with the strength of gold, is consistent with the strength of the Swiss Franc. CHF/USD has formed a 13-year base within an uptrend.

I’ll also note that commercial hedgers had become record-long foreign currencies such as CHF and CAD. They remain bullish on these currencies.

Commodities

US dollar weakness and strength in emerging markets typically means strength in commodities.

The Pring Inflation Index (which consists of energy & mining stocks) is on the verge of a 2-year breakout.

DBA (Agriculture ETF) remains in an uptrend and near former highs:

I also highlighted that physical uranium is likely putting in a major bottom (link).

In 2022, a rate hiking cycle began to cool an overstimulated economy, and commodities peaked. After two years of elevated rates, could it now be that we’re starting a rate-cutting cycle to relieve pressure on the economy (consumer discretionary remains one of the weakest sectors) just as the US dollar is breaking down and commodities want higher?

Closing Notes

During the recent market volatility, emerging markets (especially Southeast Asian countries) have been displaying leadership. Multi-year breakouts are occurring outside the US. Valuations are lower, and commercial hedgers became record-bullish emerging markets in late 2022.

The above is consistent with strength in non-US currencies and gold. It’s also consistent with broader commodities finding a floor.

The next several years could be like the 2000s where foreign stocks outperformed the US, and commodities drifted higher.

That’s all for today. Have a great rest of your weekend!

Cheers,

Brian G.

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Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.