By
Gary Gordon
:
It doesn't take much for stock markets to rev up their "risk-on"
engines. For instance, European leaders have offered little more
than verbal promises in their desire to push equity prices higher.
Meanwhile, market-watchers celebrated the Bureau of Labor
Statistics ((BLS)) Employment Report (163,000 net jobs gain), even
though a variety of unemployment / underemployment measures
degenerated in July.
In truth, European leaders have yet to agree on how to keep
Spain from spiraling out of control, let alone whether or not to
keep handing money over to Greece. What's more, roughly the same
number of people left the labor force as those who earned a new
paycheck last month; that is, the labor participation rate
continues to lose ground.
Nevertheless, investors in the major averages - S&P 500,
Dow, NASDAQ - are experiencing the rush of recent 3-month highs.
And lately, cyclical sectors from technology to materials have led
the pack.
So is risk really back on the equity table? At the start of
2012, the fastest flyers were the emerging markets, Europe and U.S.
small caps. U.S. large caps performed well, but they were not the
front-runners.
It follows that if we genuinely have an environment where
investors are willing to wade into the most aggressive end of the
stock pool, we would see Europe and the emergers and the smaller
corporations outperforming the S&P 500… like they all did in
the first 3 months of 2012. However, the Vanguard MSCI Emerging
Markets-S&P 500 price ratio ([[VWO]]:$SPX) shows relative
weakness for emerging markets, not relative strength.
(click to enlarge)
The Vanguard MSCI Europe-S&P 500 price ratio ([[VGK]]:$SPX)
also demonstrates that European stocks - like emergers - are weak
relative to U.S. equities.
(click to enlarge)
Granted, both VWO and VGK appear to have put in respective lows
in June and July. On the flip side, if these foreign ETFs do not
have the relative strength to climb above a 200-day trendline, then
we may not be experiencing a genuine "risk-on" move; rather, we may
simply be seeing increased comfort with large U.S. company stocks
at the expense of "cheaper" foreign stock assets.
What about the smaller companies stateside? For the most part,
we're still witnessing a preference for larger, well-known brand
names over the perceived risks associated with the lesser-knowns.
The iShares Russell 2000-S&P 500 ([[IWM]]:$SPX) price ratio may
demonstrate a bit more "give-n-take" between large company stock
and small company stock, but the momentum still favors the largest
corporations.
(click to enlarge)
The take-home? If you're going to allocate more to stocks, don't
get sucked in by an erroneous notion that money is pouring back
into the highest beta, most volatile assets. Exchange-traded
vehicles like SPDR S&P 500 (
SPY
), Vanguard Dividend Growth (
VIG
) and Vanguard High Dividend Yield (
VYM
) are still providing more reward for the volatility than the
above-mentioned competition… and even there, I strongly recommend
the
protection of stop-limit loss orders
.
Disclosure
: Gary Gordon, MS, CFP is the president of Pacific Park Financial,
Inc., a Registered Investment Adviser with the SEC. Gary Gordon,
Pacific Park Financial, Inc, and/or its clients may hold positions
in the ETFs, mutual funds, and/or any investment asset mentioned
above. The commentary does not constitute individualized investment
advice. The opinions offered herein are not personalized
recommendations to buy, sell or hold securities. At times, issuers
of exchange-traded products compensate Pacific Park Financial, Inc.
or its subsidiaries for advertising at the ETF Expert web site. ETF
Expert content is created independently of any advertising
relationships.
See also
A Low VIX, But All Implied Volatilities Are Not
Created Alike
on seekingalpha.com