“I believe in the power of weakness.” – Pat Buckley
As I noted in my company’s free Week in Review e-newsletter, it has been an incredibly powerful start for risk assets so far this year following the dramatic change in sentiment that occurred after the first week of January, when inflation expectations dramatically returned. While the focus so far has been on everything that has “worked,” it’s instructive to look at what hasn’t worked to see where market participants may be raising cash. Laggards can tell an investor as much about the market environment as leaders do.
With that said, I ran a screen on more than 1,000 ETFs/ETNs to get a sense of which areas of the investable landscape are showing extreme movement relative to their most recent history. Take a look at the list below, which shows those ETFs/ETNs (excluding leveraged funds) that are furthest away from their respective 20-day moving averages.
While the declines have not been enormous, it is worth noting that 7 out of the 10 ETFs above that are furthest below their respective 20-day moving averages are government bonds (EDV, TLO, VGLT, TLH, PLW, IEF, SUB). The bullish dollar weakening (UUP) and Yen (FXY) are also consistent with the performance of Treasuries in the sense that they tend to do well in “risk-off” periods. The message across the entire list of ETFs and ETNs is clear — investors are signaling across the board a strong message that risk-taking is back.
For natural gas (UNL), I suspect much of the weakness is due to the “contango effect” in futures-based products. For those unfamiliar with contango, it is a situation whereby prices in following-month futures are higher than spot, meaning there is a “negative roll yield” in the way those futures-based ETFs maintain exposure to the underlying commodity. This is a continuous cost that occurs in the ETF structurally, which likely explains why it is the only commodity in the list that has dramatically underperformed other risk assets.
From an action standpoint, the momentum and weakness in the risk-off trade may well continue, making bets against fixed income likely a high-probability trade in the near term. While one can buy an inverse bond ETF such as TBT, I think a better way to bet against bonds is simply to go long stocks, as I referenced in my latest Bloomberg Radio interview, which can be heard here.
The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.