Day Hagan Research Update




Expectations versus reality continue to diverge between the domestic and global equity markets and actual economic results.


Neil Leeson


May 1, 2017


There are well over 1,700 domestically traded, long-only, non-leveraged ETFs. It is impossible and unnecessary to monitor all of them. Most investors would be wise to narrow their universe to fewer than twenty ETFs as a baseline for market analysis and then expand to specific sectors, countries and capitalizations as needed. We like to use a top-down approach when selecting equity ETFs for our portfolio, starting with regions, then moving to countries and finally, if data warrants, getting more granular by examining sector, style and capitalization charts.

By far, the U.S. equity market is the broadest-based market, with multiple stocks and ETFs in a multitude of sectors, styles and capitalizations. From a global perspective, U.S. stocks are 45% of the MSCI All Country World Index (ACWI), one of the most popular global equity market benchmarks. The U.S. is the only country that has very liquid and tradeable ETFs across all segments of the capital markets. Therefore, our analysis nearly always starts with the North American region after our global assessment.

As we wrote in last week's blog, we are more focused than ever on trend, momentum and relative strength. We recognized that domestic and some international markets are stretched from a historical-valuation, monetary, and growth perspective, but we embrace the fact that strong trends can support markets well beyond the warnings of non-price based external indicators. Eventually, global growth, which should lead to better equity valuations, could be a supporting factor, but for now the expectation of growth may be enough.

From a regional perspective, we are seeing the strongest trends and momentum in Emerging Market Equities, particularly in Asian markets. Not surprisingly, many international ETFs, including Emerging Market funds, are capitalization weighted. This weighting scheme puts the bulk of EM fund allocation—in most cases, close to 50%—into the large-cap Financial and Technology sector EM stocks. For broad EM market exposure, we continue to favor IEMG, the iShares Core MSCI Emerging Markets ETF, which has allocated more than 55% to Asian markets. For an Asian-specific fund, we continue to favor and own AAXJ, the iShares MSCI All Country Asia ex Japan ETF. However, while we are maintaining exposure in EM markets, we wouldn't advocate adding exposure at this time because both AAXJ and IEMG are at historically overbought levels (AAXJ shown below).

Momentum Mean Reversion (Z-Score) of Year/Year Rate-of-Change
Mean Reversion Explanation:
NDR's mean reversion indicator is used to identify those ETFs that have reached extremes based on a 5-year Z-score of yr/yr ROC.
Scores range from one to five, with (5) identifying extreme oversold conditions, and (1) identifying extreme overbought conditions.
(3) is an ETF that is neither overbought or oversold. (2) & (4) are used for an ETF that is nearing overbought or oversold extremes.
5 = Z-score below -2 and has moved .1 above the 30-day MA (bullish)
4 or 2 = Z-score below/above -1/+1 (get ready)
3 = Z-score between -1 and +1 (neutral)
1 = Z-score above +2 and has moved .1 below its 30-day MA (bearish)
(MEANR_AAXJ) Momentum Mean Reversion (Z-Score) of Year/Year Rate-of-Change


Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

Continuing with a top-down approach in EM reveals that India has been one of the strongest markets on an absolute and relative basis. However, just like composite EM equity ETFs, India is also overbought at this time. Nonetheless, we continue to maintain exposure through our composite EM funds and would increase our exposure once longer-term, overbought conditions are resolved. And we may consider adding an Indian ETF as well, given that it continues to show good economic growth.

India's Real GDP (Year-to-Year Change)



On a relative basis, the Latin American region has been the second-strongest region of the four major regions. Regional returns have been driven by Brazilian equities. Much of the strength in Latin American equities can be attributed to the strength of their currencies versus the U.S. dollar. It is important to understand for dollar-based investors in international funds to take currency exposure into account. The Brazilian Real Fund (BZF) has gained over 7% this year (below). Within Brazil, small-caps have been some of the best-performing global equities this year. Unfortunately, funds like BRF are too small for us to invest in through the secondary market. For now, we recommend exposure to broader Latin American ETFs as long as trend indicators remain solid and the currencies remain strong or stable versus the U.S. dollar.

Wisdom Tree Brazilian Real Fund Total Return on 04/28/2017 = 18.300. 50-Day Moving Average 04/28/2017 = 18.338.


In sum, Emerging Market ETFs remain a favorite of ours. We have exposure to broad EM funds and will look to increase that exposure once longer-term overbought conditions are resolved, either by a pullback in those funds or slower momentum over the intermediate term. Additionally, we continue to monitor trends in CEW, the WisdomTree Emerging Currency Fund (below), because we want the currency in our favor when investing in international, dollar-based ETFs.

Wisdom Tree Emerging Currency Fund Total Return dated 04/28/2017 = 18.390. 50-Day Moving Average dated 04/28/2017 = 18.259



The third-strongest region this year has been Europe. The Euro has had its ups and downs this year but still has positive gains (3.2% as measured by FXE), adding to the gains in dollar-based European funds. Like other regions, emerging Europe has outperformed its developed counterparts. Poland has been one of the top global equity markets this year.

European equities continue to benefit from easy monetary policies and relatively low interest rates compared to U.S. rates. A stronger Euro is an added benefit for U.S. investors at this time, who should remain in-country, and composite funds that do not hedge the currency exposure. Within developed Europe, small-cap German ETFs have been the standout performer. EWGS, the iShares MSCI Germany Small-Cap ETF has gained over 18% on the year. Unfortunately, like the smaller-cap Brazilian fund mentioned earlier, there just isn't enough liquidity and size for us to trade this in the secondary market. However, we do consider SCZ, the iShares MSCI EAFE Small-Cap ETF, to be an attractive alternative in the composite European fund space, although over 30% of the fund is allocated to small-cap Japanese stocks. For a little less Japanese exposure and more European, we are also considering VSS, the Vanguard FTSE All World (ex-US) Small Cap Index Fund.

Nonetheless, we continue to maintain our core European allocation in VGK, the Vanguard FTSE Europe ETF. As shown on the chart below, many factors continue to bode well for this fund. Relative strength and breadth are strong, and well over 64% of its indicators are in bullish mode in the composite technical model.

Vanguard FTSE Europe ETF (VK)


VGK Performance Analysis Date: 1/08/1988 - 4/28/2017

Current Mode Entry Date: 0/09/2017

(EFT/ETN Inception Date 3/15/2005, NDR estimates prior to inception.)

Indicators shown may or may not be part of the composite model. Composite model parameters are intended to show hypothetical performance and should not be used as absolute buy or sell levels. Historical performance does not imply nor indicate future returns.

Performance When Composite Model Is: % Gains/Annum % of Time
* Above 64 (Bullish) 10.4 69.7
Between 43 and 64 (Neutral) 1.5 17.1
Below 43 (Bearish) -3.3 13.2


Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to


The U.S. market has been far stronger than the Canadian market in North America. We continue to hold positions in large-cap growth and value, as well as small-cap growth utilizing broad composite index funds. We remain with this mindset because sector strength and leadership has ebbed and flowed all year. As shown on the table below, there has been no clear sector leadership for the past several months. The Financial sector this year, for example, was the third-worst performer in January, second best in February, and the worst in March. And in April, not shown, it came off the bottom, but not by much.

Numbers represent percentage returns for the specified period. Shows returns for prior 12 months. Year-to-Date returns reflect prices through the close before the run date of the report.


Because there have been such muddied sector trends this year in the U.S., we continue to hold broad composite index funds. However, over the past several weeks due to earnings season, it does appear that investors are shifting towards those stocks and sectors that are making money (positive earnings and revenue) and guiding higher (Technology, Discretionary and Health Care). They are also reducing exposure to areas of the markets where expectations may be high, but the numbers have yet to back up the story (Financials and Energy), and two areas under pressure from less optimism are higher interest rates and oil prices. Many broad-market indexes and ETFs are near new highs, which is an okay sign of market participation and breadth. However, for many indexes to move beyond current levels, all sectors need to carry the burden. A lot has to do with the construction of the major indexes. The S&P 500 Index fund (SPY), for example, is nearly 20% technology stocks. This weighting has kept the index near all-time highs, but it needs help from financials, which are 14% of the weight, and even energy stocks that comprise 6.2% of the index. Narrow leadership does not bode well for composite indexes. While composite indexes do offer the benefit of diversification, they can become burdened by underperforming stocks and sectors.

The QQQS (Nasdaq 100 ETF) hit and held new highs last week and remains well above important moving averages. It is overbought, but is not overvalued based on historical measures (below). And the reality is, companies that make up this technology/growth index are making money and have cash on hand to expand and make more money. Certainly, their fate ultimately depends on the consumer and economic growth, but we must consider increasing our allocation to this segment of the market. In order to outperform the "market," one has to "tilt" towards the clear leaders.

04/03/2017 Bench Chart


Finally, we have to ask ourselves what will push the indexes back to new highs and above. Will it be the tax plan, revisions to or replacement of ACA, an infrastructure bill, or company fundamentals and good earnings? This takes us back to expectations versus reality, and we remain on the side of reality. We continue to monitor global market trends and tilt our portfolio to those areas of relative trend and momentum strength.

Have a wonderful week,

Neil Leeson
Day Hagan Investment Committee Consultant
Day Hagan Asset Management

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM's past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Day Hagan Asset Management and Mutual Funds ©   |  Disclosures  |  Site Design by Lee Towle Designs