State of the markets – mid-February

Published on February 15, 2020.

Time for a quick mid-month analysis of current market trends. As usual the trend assessment below is based on a simple, binary metric:

up trend = price > 40 week average (SMA 40)
down trend = price < SMA 40

The market timing status is characterized by another simple metric:

buy = recent 4-week-Exponential Moving Average (EMA 4) cross above SMA 40 (within the last 2 weeks)
sell = recent EMA 4 cross below SMA 40 (within the last 2 weeks)
hold = wait for next buy or sell signal

Global stock markets

Major stock markets closed the week at new All-Time-Highs on February 14, namely the S&P500, the Nasdaq100 and the DAX. It is noteworthy though that the broader market in the US shows relative weakness, with the Russell 2000 still below its August 2018 high. In Europe the FTSE100 in the UK is relatively weak, almost flirting with a break of its 40 week moving average.

markettrendtiming
S&P 500 – SPXuphold
Nasdaq100 – NDXuphold
Russell 2000 – RUTuphold
Germany – DAXuphold
UK – FTSE100uphold
Europe – Eurostoxx50 – ESTX50uphold
Japan – Nikkeiuphold
China – Shanghai Compositeuphold
HK – Hang Senguphold

Stock market to watch: Hong Kong

The Hang Seng Index reversed its downtrend – there was no sell signal active so there is also no new buy signal. However, price is very close to its 40-week moving average, which is generally not the worst spot to initiate new positions (long or short) from a reward-to-risk-perspective.

Hang Seng Index, February 15, 2020.
Hang Seng Index, February 15, 2020.

Global bond markets

Global fixed income markets are in strong uptrends.

markettrend timing
US 10 year GOVT bonds (IEF)uphold
US 20 year+ GOVT bonds (TLT)uphold
Vanguard Eurozone ETF (VETY)uphold
US Treasury bonds ETF (VUTY)uphold
BIV Vanguard Intermediate Term bonds ETF (BIV)uphold
Vanguard Emerging Markets bonds ETF (VDET)uphold
Vanguard Extended Duration bonds ETF (EDV)uphold
Vanguard Euro Corporate bonds (VECP)uphold
ishares Inflation Link Govt Bond (IBC1)uphold

Bond ETF to watch: VUTY

Vanguard VUTY US Treasury Bonds closed the week at new highs after a playbook-bounce from the 40 week-moving average – the trend is your reliable friend since April 2018 in this case.

VUTY US Treasury Bonds, February 15, 2020.
VUTY weekly chart – February 15, 2020.

Commodities & Metals

Commodities are still in downtrends except for Precious metals, which are in long-term uptrends.

market trend timing
Invesco DB Commodities Index (DBC)downhold
Crude OILdownhold
GOLDuphold
SILVERuphold
COPPERdownhold

Metal to watch: Copper

Copper held at the 2.50 support for now and is bouncing back a bit. Another strong week or two would be required for a reversal of the trend.

Copper weekly chart - February 15, 2020.
Copper weekly chart, February 15, 2020.

Forex & Crypto Markets

The Euro is very weak and closed at new 3-year-low, also further weakness in AUD and CAD against the US-Dollar. The British Pound is holding up quite well against the strengthening Dollar so far. Bitcoin and Etherum trend is up with weekly buy signals triggered.

market trend timing
EURUSDdownhold
GBPUSDuphold
USDCADupbuy
AUDUSDdownhold
BTCUSDupbuy
ETHUSDupbuy
XRPUSDuphold (buy)

Currency pair to watch: USDCAD

USDCAD entered a new uptrend along with a weekly buy signal. The trend is still vulnerable, being close to the 40 week moving average.

USDCAD weekly chart, February 15, 2020.
USDCAD weekly chart, February 15, 2020.

Crypto asset to watch: XRP

XRPUSD is moving above its 40 week moving average for the first time since May 2019. A new trend buy signal (EMA 4 > SMA 40) has not been generated yet but we are very close to it.

XRPUSD - February 15, 2020.
XRPUSD weekly chart – February 15, 2020.

Real Estate (REITs)

Both US REITs (VNQ) and European REITs broke out to new highs last week, almost going parabolic right now.

market trend action
US – VNQuphold
Europe – XDERuphold

REIT to watch: XDER

XDER has been in a remarkably steep advance since September 2019, which accelerated last week.

XDER European REITs weekly chart
XDER weekly chart, February 15, 2020.

Markets Trend Report 02/2020

Published on February 1, 2020.

The first month of 2020 is in and let’s see where global financial markets stand heading into February. In this short, technical trend analysis, we take a look at various asset classes and their trends at the beginning of February, 2020. The trend assessment below is based on a simple, binary metric:

up trend = price > 40 week average (SMA 40)
down trend = price < SMA 40

The market timing status below is characterized by another simple metric:

buy = recent 4-week-Exponential Moving Average (EMA 4) cross above SMA 40 (within the last 2 weeks)
sell = recent EMA 4 cross below SMA 40 (within the last 2 weeks)
hold = wait for next buy or sell signal

Global stock markets

Major stock markets are still in long-term uptrends. Developed markets like the US and Europe are far above their 40 week/200 day moving averages. Recent downtrends were registered on the UK FTSE100 and Hong Kong indexes. In Hong Kong the Christmas 2019 buy signal was invalidated (price below 40 week average) but no new weekly sell signal has been generated so far (4 week EMA still slightly above 40 week SMA). This might be the case on Feb 7, provided markets trade at or below current levels next week.

markettrendtiming
S&P 500 – SPXuphold
Nasdaq100 – NDXuphold
Russell 2000 – RUTuphold
Germany – DAXuphold
UK – FTSE100downhold
Europe – Eurostoxx50 – ESTX50uphold
Japan – Nikkeiuphold
China – Shanghai Compositeuphold
HK – Hang Sengdownhold

Stock market to watch: Hong Kong

The Hang Seng Index started an uptrend in December with a new buy signal generated on Dec 23, 2019 (EMA 4 > SMA 200). The trend signals in 2019 were not sustainable and as it seems right now, 2020 starts out with more of the same.

Hang Seng Index below 40 week moving average again.
Hang Seng Index as of January 31, 2020.

Global bond markets

Global fixed income markets are in existing uptrends which have only strengthened at the end of January as markets shifted towards risk-off-mode.

markettrend timing
US 10 year GOVT bonds (IEF)uphold
US 20 year+ GOVT bonds (TLT)uphold
Vanguard Eurozone ETF (VETY)uphold
US Treasury bonds ETF (VUTY)uphold
BIV Vanguard Intermediate Term bonds ETF (BIV)uphold
Vanguard Emerging Markets bonds ETF (VDET)uphold
Vanguard Extended Duration bonds ETF (EDV)uphold
Vanguard Euro Corporate bonds (VECP)uphold
ishares Inflation Link Govt Bond (IBC1)uphold

Bond ETF to watch: TLT

TLT tracks and holds long-term US government bonds with a duration of more than 20 years. After the successful test of the 40 week average the market continues its uptrend and is not far from new highs.

TLT on the way to new highs after a successful retest of the 40 week moving average.
TLT weekly chart, January 31, 2020.

Commodities & Metals

Commodities got hit hard at the end of January and are trend-down except for Precious metals, which continue to hold up strongly.

market trend timing
Invesco DB Commodities Index (DBC)downsell
Crude OILdownsell
GOLDuphold
SILVERuphold
COPPERdownsell

Metal to watch: Copper

Copper, commonly known as a leading global economic macro indicator (“Dr. Copper”), initiated a new uptrend and a trend buy signal in December 2019. Furthermore, the break of its downtrendline from 2018 acted as bullish confirmation. Well, the party was short lived. This is a good example that setups fail all the time and one should not get married to certain expectations. If you follow the trend, you may have to ride out some nasty whipsaws until a bigger trend takes off. So here we go with a continuation of the downtrend and a weekly sell signal by a tiny margin. Copper is now deep in the 2.45-2.60 support zone, which held up since late 2016.

Copper sold off sharply in the last week of January 2020.
Copper weekly chart, January 31, 2020.

Forex & Crypto Markets

The Euro is still weak though not far below its 40 week average. The Canadian and Australian Dollar sold off sharply along with commodities at the end of January. Bitcoin trend is up but the weekly buy signal has not triggered yet – though it is already very close.

market trend timing
EURUSDdownhold
GBPUSDuphold
USDCADuphold
AUDUSDdownhold
BTCUSDuphold
ETHUSDdownhold
XRPUSDdownhold

Crypto asset to watch: Bitcoin

BTCUSD is on the verge of continuing its April 2019-uptrend. A weekly close above 9.000 on February 2 or in the week after, would very likely generate a new trend buy signal (EMA 4 > SMA 40).

Bitcoin is back above its 200 day moving average for a bullish continuation of its advance since April 2019.
BTCUSD weekly chart – February 1, 2020.

Real Estate (REITs)

US REITs (VNQ) tested the 40 week moving average and continued the uptrend so far. European Real Estate has been extremely strong for quite a while too.

market trend action
US – VNQuphold
Europe – XDERuphold

REIT to watch: XDER

XDER has been in a remarkably steep advance since September 2019, almost without a pause. A deeper correction seems overdue.

XDER European Real Estate on the rally.
XDER weekly chart, January 31, 2020.

Global Trend Report 01/2020

New month, new year, new decade. In this short, technical trend analysis, we take a look at various asset classes and their trends at the beginning of 2020. The trend assessment below is based on a simple, binary metric:

up trend = price > 40 week average (SMA 40)
down trend = price < SMA 40

In a trend following strategy – which might be useful for achieving buy and hold-like returns with lower volatility – you would want to buy, sell or sell short upon trend changes. Also, trend changes can be used for re-balancing existing investment portfolios in order to maximize risk-adjusted returns. The market timing status below is characterized by another simple metric:

buy = recent 4-week-Exponential Moving Average (EMA 4) cross above SMA 40 (within the last 2 weeks)
sell = recent EMA 4 cross below SMA 40 (within the last 2 weeks)
hold = wait for next buy or sell signal

Global stock markets

Basically all major stock markets are in long-term uptrends. Developed markets like the US and Europe are far above their 40 week/200 day moving averages. Recent trend buy signals according to the definition above were generated on the Shanghai Composite and Hong Kong indexes.

markettrendtiming
S&P 500 – SPXuphold
Nasdaq100 – NDXuphold
Russell 2000 – RUTuphold
Germany – DAXuphold
UK – FTSE100uphold
Europe – Eurostoxx50 – ESTX50uphold
Japan – Nikkeiuphold
China – Shanghai Compositeupbuy
HK – Hang Sengupbuy

Stock market to watch: Hong Kong

The Hang Seng Index started a new uptrend in December with a new buy signal generated on Dec 23, 2019 (EMA 4 > SMA 200). The trend signals in 2019 were not sustainable, let’s see if 2020 allows for a new longer-term uptrend.

Hang Seng Index - January 7, 2020. A trend buy signal was generated on Dec 23, 2019.
Hang Seng Index – January 7, 2020

For a recent fundamental analysis on Global stock markets and their valuations, please check out the Global Value Portfolio for 2020.

Global bond markets

Global fixed income markets are mostly in existing uptrends as well but there are some markets which are quite close to their 40 week moving averages, so there could be some sell signals not too far ahead.

markettrend timing
US 10 year GOVT bonds (IEF)uphold
Vanguard Eurozone ETF (VETY)uphold
US Treasury bonds ETF (VUTY)uphold
BIV Vanguard Intermediate Term bonds ETF (BIV)uphold
Vanguard Emerging Markets bonds ETF (VDET)uphold
Vanguard Extended Duration bonds ETF (EDV)uphold
Vanguard Euro Corporate bonds (VECP)uphold
ishares Inflation Link Govt Bond (IBC1)uphold

Bond ETF to watch: EDV

EDV tracks and holds long-term US government bonds with a duration from 20 to 30 years. The 40 week uptrend was tested recently for the first time since February 2019 – so far the uptrend remains intact.

EDV Vanguard World Fund Extended Duration ETF - January 7, 2020. Price touched its 40 week average recently.
EDV weekly chart – January 7, 2020.

Commodities & Metals

market trend timing
Invesco DB Commodities Index (DBC)uphold
Crude OILuphold
GOLDuphold
SILVERuphold
COPPERuphold

Metal to watch: Copper

Copper initiated a new uptrend in December 2019 accompanied by a trend buy signal. Price also broke above its downtrendline from 2018 which should act as first line of support, the 40 week moving average is the second defense right below.

Copper weekly chart - January 7, 2020. New uptrend in Copper started in December 2019.
Copper weekly chart – January 7, 2020.

Forex & Crypto Markets

The US-Dollar (USD) showed remarkable relative strength throughout 2019. At least in the short term there is some weakness in USD heading into 2020 as major currencies like the British Pound, the Canadian and the Australian Dollar and the Euro, are all on new or recent uptrends against the Dollar.

market trend timing
EURUSDuphold
GBPUSDuphold
USDCADdownhold
AUDUSDuphold
BTCUSDdownhold
ETHUSDdownhold
XRPUSDdownhold

Currency pairs to watch: EURUSD and AUDUSD

EURUSD is on the verge of breaking its longer-term downtrend, which has been active since April 2018. A weekly close above 1.1150 on January 10 would very likely generate a new trend buy signal (EMA 4 > SMA 40).

EURUSD weekly chart with potential buy signal - January 7, 2020
EURUSD weekly chart – Jan 7, 2020.

The Australian Dollar broke above its 40 week average at the end of December 2019 with price heading back down again. EMA 4 and SMA 40 are basically at the same level. Price would have to close above 0.69 this week for a confirmed buy signal.

Australian Dollar/US-Dollar weekly chart - January 7, 2020.
AUDUSD weekly chart – January 7, 2020.

Real Estate (REITs)

European REITs are in a very strong uptrend with price far above the 40 week moving average. Some reversion to the mean could be expected from this level.

market trend action
US – VNQuphold
Europe – XDERuphold

REIT to watch: VNQ

VNQ has been in a strong uptrend for about a year and has recently tested the 40 week moving average for the first time. A new downtrend and a potential trend sell signal are not far away and could be triggered upon a weekly close below 90.

VNQ Vanguard Index Funds Real Estate - weekly chart, January 7, 2020.
VNQ weekly chart – January 7, 2020.

The Global value portfolio 2020

As the stock markets seem to be set for ending the decade at or near All-Time-highs, let’s see where we can find the greatest value going into the next decade. Therefore we look at the CAPE ratio (basically a P/E ratio, smoothed out over a 10 year period) of global stock markets and aim to construct a simple value portfolio covering the cheapest stock markets with ETFs.

Comparing Global CAPE ratios

The CAPE ratio is commonly used for comparing the valuation of international stock markets and therefore we will use it in this short analysis. We want to set up a global portfolio investing in the cheapest stock markets worldwide. These markets are not all depressed, but valuations are considerably lower than in the US, where the CAPE ratio is currently around 30, which is very high historically. Meb Faber has a great podcast on using the CAPE ratio as a timing system, including great resources for Global Stock Valuations.

By investing in cheaper countries around the world, we may be able to reduce the downside risk of our investments considerably. Furthermore, the concept of mean reversion would also favor such a strategy, as valuations can be expected to converge somewhat over time.

So here are the cheapest stock markets around the world and their CAPE-ratios:

CountryCAPE Oct 2019% of World Market Caprel. share of Market Cap in %
Oman7.40,025%0,1%
Turkey7.60,197%0,79%
Russia7.70,761%3,04%
Czech Republic9.80,05%**0,2%
Poland11.20,212%0,85%
Jordan11.70,03%0,12%
South Korea12.11,867%7,46%
Qatar12.50,215%0,86%
United Arab Emirates13.90,31%*1,24%
Spain14.00,956%3,82%
Egypt14.00,055%0,22%
Singapore14.00,908%3,63%
China14.58,35%33,38%
Malaysia14.80,526%2,1%
Hong Kong14.9.5,04%20,15%
Chile15.10,331%1,32%
United Kingdom15.84,5%*17,99%
Israel15.90,248%0,99%
Norway16.00,353%1,41%
Morocco16.00,081%0,32%
25,02%100%

CAPE data: starcapital.de
Market Cap data: Worldbank.org
* Source: Seeking Alpha
** estimate based on 2008 data from Worldbank.org

Building the portfolio

In the table above we have listed countries with a CAPE ratio below 16.0 in order to find the cheapest markets in world. The resulting portfolio covers about 25 percent of the current Global Market Capitalization according to data from Worldbank.org, therefore 75% of global stock markets are currently on CAPE ratios above 16.0 and not considered for our purpose. The portfolio mainly consists of Emerging Market countries, which represents an interesting diversification to any portfolio currently focusing on the US or other, more expensive markets.

The relative Market Cap percentages within the portfolio show that China, Hong Kong, United Kingdom, South Korea, Singapore, Spain and Russia cover about 80 percent of the portfolio.

From theory to practice

We could use country-specific ETFs to cover the markets listed in the table above and at least for the major countries this would be feasible in a relatively efficient way. However, not all of the countries can be covered by low-cost investments in specific ETFs, so for simplification it makes sense to use regional ETFs. Let’s take a look at some regions and their combined CAPE ratios (data source: Starcapital.de):

MarketCAPE
Emerging Europe9.7
BRICs14.6
Emerging Markets World15.1

The Simple CAPE investment strategy

Invest equal-weighted in an Emerging Europe ETF, a BRICs ETF and an Emerging Markets World ETF.

3 options below:

ishares MSCI Eastern Europe Capped UCITS ETF
Vanguard FTSE Emerging Markets UCITS ETF
ishares BRIC 50 UCITS ETF

This strategy makes sense from a valuation-perspective long-term but may come with considerable risk and volatility in the short- and medium term. However, especially as an addition to existing investments in more expensive regions of the world like the US, it represents an interesting diversification.

Update February 24, 2020: Thanks to Stonevest.org for pointing out that the simple CAPE Strategy above is very concentrated on China and Russia. This might be ok considering the relatively low CAPE ratios of these countries but there is certainly the argument for more diversification. Thus you could for example add a UK-focused ETF and reduce the weight of the BRICs.

The Ultra-Low-Cost Global Investment Portfolio

As Index Fund pioneer Jack Bogle and other professional investors have pointed out for decades and investment research has shown, low costs and fees are paramount in maximizing real investment returns long-term. Why are costs so important, especially for the long-term investor?

Why costs matter in investing

Let’s do a simple comparison of two exemplary investment portfolios to show the impact of costs in the long-term.

Portfolio 1Portfolio 2
Total Value$500K$500K
Total expense ratio1.5% p.a.0.1% p.a.
Annual expense amount:$7,500$500

The portfolios show expenses of $500 vs. $7,500 annually, that’s a whopping $7,000 difference every year. If that does not shock you right away, take that $7,000 over 30 years reinvested at 6% p.a. and you arrive at a difference of more than $550,000, which is the cost-based outperformance of Portfolio 2, assuming equal returns.

You would need exceptional, consistently higher returns in the high-cost investment in order to just offset the cost disadvantage – good luck with that. Research has shown that you simply cannot expect that, so you give away a fortune over a lifetime of investing as your portfolio grows in size! Just one simple investment rule – sticking to a low cost asset allocation – may save you thousands of Dollars per year, which you can invest instead.

How to keep costs low

In a diversified investment portfolio, or in other words, a global asset allocation, keeping costs low can be tricky, as the universe of investable financial instruments expands daily. To make matters worse, if you want to include Real Estate and Commodities in addition to Equities and bonds in your allocation, costs can increase significantly.

However, thanks to the emergence of low-cost Index Funds and ETFs, building an ultra-low-cost global investment portfolio is now more than doable for the average investor.

So let’s check out a few allocations. I will not discuss the weights of the various asset classes and the selected ETFs in detail. For the purpose of this article, we just focus on low costs and diversification among asset classes.

The portfolios below clearly represent a diversified allocation for a long-term, capital-building investors. For retired investors aiming for capital preservation and lower volatility, a lower Equities-weight may be suitable.

1. “The World’s lowest cost portfolio”

This portfolio was published by Matt Hougan on etf.com in 2017. At a total expense ratio of just 0.05% p.a. you are already close to zero costs with this allocation.

Asset ClassWeightFundTickerTER
U.S. Equity40%iShares Core S&P Total
U.S. Market ETF
ITOT0.03%
Developed
Markets Equity
30%SPDR S&P World ex-US ETFGWL0.04%
Emerging
Markets Equity
5%SPDR Portfolio Emerging
Markets ETF
SPEM0.11%
Fixed Income15%Schwab U.S. Aggregate BondSCHZ0.04%
REITs5%Schwab U.S. REIT ETFSCHH0.07%
Commodities5%GraniteShares Bloomberg
Commodity Broad Strategy
No K-1 ETF
COMB0.25%
Combined weighted fee0.05%

Source: etf.com

2. Lower costs by getting paid for ETF holdings

This portfolio builds on the approach shown above and was published in a recent article by Ryan Kirlin on alphaarchitect.com. It includes a US Equities ETF that currently pays you 0.05% p.a. just to hold it. Though this may be temporary only, it also shows where fees could be headed. Why not negative fees in an age of negative interest rates?

Asset ClassWeightFundTickerTER
U.S. Equity40%Salt Low truBeta US
Market Fund
LSLT-0.05%
Developed
Markets Equity
30%SPDR Portfolio Developed
World ex-US ETF
SPDW0.04%
Emerging
Markets Equity
5%SPDR Portfolio Emerging
Markets ETF
SPEM0.11%
Fixed Income15%Vanguard Total Bond
market ETF
BND0.04%
REITs5%Schwab U.S. REIT ETFSCHH0.07%
Commodities5%GraniteShares Bloomberg
Commodity Broad
Strategy No K-1 ETF
COMB0.25%
Combined weighted Fee0.0195%

Source: alphaarchitect.com

This portfolio drives fees even further down – almost close to zero with a weighted fee of 0.0195% p.a.

3. An ultra-low-cost option for Europeans

The low-cost portfolios above are quite US- and US-Dollar-focused in all asset classes. Furthermore, not all of these ETFs may be accessible to retail investors in Europe. Especially in the bonds & REITs-section, a more global approach may be suitable, although it comes with slightly higher costs. The selection below should be tradeable for most European investors through the online broker of their choice:

Asset ClassWeightFundTER
U.S. Equity20%Invesco S&P 500 UCITS ETF USD0.05%
Developed
Markets Equity
20%SPDR MSCI World UCITS ETF USD0.12%
European Equity30%Invesco EURO STOXX 50 ETF EUR0.05%
Emerging
Markets Equity
5%iShares Core MSCI Emerging
Markets IMI UCITS ETF USD
0.18%
Fixed Income15%SPDR Bloomberg Barclays Global
Aggregate Bond EUR Hedged
UCITS ETF
0.10%
REITs5%Think Global Real Estate UCITS
ETF EUR
0.25%
Commodities5%ishares Diversified Commodity
Swap UCITS ETF USD
0.19%
Combined weighted fee0.095%

At a combined total expense ratio of 0.095% this portfolio is considerably more expensive than portfolios 1 and 2 above, but it is still very low-cost and way cheaper than lots of the alternatives out there.

The good thing is, it will probably only get cheaper further down the road, with the zero-cost-ETF-portfolio not too far away anymore. Think of ETFs whatever you want (ETFs Pros & Cons may be a topic for another post), but at least the retail investor has a choice now, e.g. to invest in a globally diversified portfolio at below 0.1% fees p.a. Isn’t that great? – Compare that to the dark ages of the 20th century where as retail investor you may have had to pay up to 2.5% p.a. for your mutual fund selection, which very likely delivered nothing but underperformance for you and excess profits for Wall Street.

Disclaimer: Personal opinion, no investment advice.