Day Hagan/Ned Davis Research Smart Sector® International Strategy Update April 2024
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Day Hagan/Ned Davis Research Smart Sector® International Strategy Update April 2024 (pdf)
Catastrophic Stop Update
The NDR Catastrophic Stop Sell model combines time-tested, objective indicators designed to identify high-risk periods for the equity market. The model (Figure 1) improved during the month and entered April with a recommendation for a fully invested equity allocation.
Figure 1: Smart Sector® Catastrophic Stop Sell Model
The bullish reading from the model is driven by strong internals. Five of the seven price-based measures—including relative strength, trend, and breadth—remain bullish. External measures such as option-adjusted spreads, global trade, and high-yield and emerging market breadth remained bullish. Short-term sentiment—as measured by the NDR Daily Trading Sentiment Composite—moved back to neutral during the month (Figure 2). For now, the weight of the evidence recommends a fully invested allocation to equities according to the model.
Figure 2: Excessive Short-Term Optimism Has Been Relieved: Neutral for Stock Exposure
Global Market Update
The ACWI ex. U.S. Total Return Index gained over 320 basis points (bps) in March. The index has risen for four of the last five months. Spain, Peru, Austria, Taiwan, and Italy were among the strongest-performing markets, while the largest underperformers included Hong Kong, Qatar, Portugal, Greece, and Hungary.
The world economy remains on solid footing, according to the latest global composite (services and manufacturing) S&P Global Purchasing Managers’ Index (PMI). The global composite rose in February for a fourth straight month, and it showed the strongest growth in eight months. Accelerating economic momentum, as depicted by the composite PMI, has historically been associated with equity market outperformance (Figure 3).
Global economic indicators have been showing increasingly more signs that global recession risk is ebbing. Global composite new orders grew at the fastest pace in eight months, while the future output index remained near its highest level since May. Perhaps most significantly, trends are broadening. Both the manufacturing and services sectors expanded in tandem for the first time since May 2023.
Along with the pick-up in growth came a modest pick-up in inflation, particularly output prices. The increase was broad-based among both developed and emerging economies. If sustained, this could delay the widely anticipated broad-based central bank easing in the second half of this year.
Entering April, the non-U.S. equity Core model overweighted China and Germany. Japan and Canada are neutral. The U.K., France, Switzerland, and Australia are underweight. The Explore model favored Malaysia, the Philippines, Poland, Sweden, and Taiwan.
Figure 3: Global Composite PMI (Three-Month Change) vs. MSCI ACWI
Core Allocations
NCanada maintained its neutral allocation as the market’s trend continued to move higher (Figure 4) with strengthening long-term breadth. On a relative basis, valuations remain attractive as the economy is improving.
Inflation eased in February, indicating that the Bank of Canada may shift to a less restrictive monetary policy in the coming months. The consumer price index rose 2.8% last month from a year ago, following a 2.9% increase in January. The Bank of Canada’s preferred core inflation measures also decreased.
Figure 4: Canada Absolute Trend Continues to Move Higher
Japan’s allocation remains near benchmark weighting as the trend and breadth remain positive. None of the technical indicators are bearish on the market. However, half the external indicators (relative valuations, near-term earnings growth, and investor sentiment) are negative on the region.
Despite the slump in real GDP, economic surprises have been positive overall (Figure 5), a historically favorable condition for equities. Other data, including business sentiment, services PMI, and the unemployment rate, are holding up reasonably well.
Figure 5: Japan Citigroup Economic Surprise Index vs. MSCI
France and Switzerland remain underweight this month due to technical, macro, and fundamental weaknesses. No technical indicators are bullish for either market.
French industrial production slumped more than expected to start the year, indicating the region’s second-largest economy is struggling to recover from the energy crisis. European forward earnings expectations reflect the challenging environment as they remain in a downtrend (Figure 6). However, the European Central Bank (ECB) recently noted that although the odds for monetary easing have increased, it does not imply a series of forthcoming interest rate cuts.
Figure 6: Europe Earnings Revisions Remain in Downtrend
The U.K. maintained an underweight allocation for April. Economic trends are still lackluster, as NDR’s U.K. Economic Timing Model is declining, and relative PMI momentum has been negative for over a year.
Relative market sentiment improved from its fall lows, but it has now started to reverse from an optimistic extreme. Earnings revisions remain low relative to historical tendencies, and the equity risk premium is weakening on a relative basis.
The market recognizes these risks as equities remain in a relative downtrend (Figure 7) with weak breadth. None of the region’s technical indicators are bullish.
Figure 7: U.K. RelativeStrength Remains in a Downtrend
Explore Opportunities
Among the top-ranked Explore markets are Malaysia, Philippines, Poland, Sweden, and Taiwan.
All markets have favorable price trends as their 50-day moving averages trade above their 200-day counterparts.
Near-term, Sweden is more than one standard deviation oversold. Over the long term, Malaysia and the Philippines are oversold. Such oversold conditions may provide a near-term bounce opportunity.
Malaysia, the Philippines, and Poland have low market capitalization-to-GDP ratios, which typically indicate a favorable valuation.
All markets have positive relative valuation spreads between their respective earnings yields and 10-year government bond yields.
Malaysia’s cyclically adjusted price-to-earnings ratio is more than one standard deviation below its historical tendency (Figure 8).
The Philippines has a manufacturing Purchasing Managers’ Index in expansionary territory.
All markets have over 50% of stocks with positive earnings revisions from analysts. Malaysia has among the highest percentage of earnings revisions across markets.
Malaysia, the Philippines, and Taiwan have double-digit forward earnings growth readings.
Figure 8: MSCI Malaysia
Summary
Entering April, the non-U.S. equity Core model overweighted China and Germany. Japan and Canada are neutral. The U.K., France, Switzerland, and Australia are underweight. The Explore model favored Malaysia, the Philippines, Poland, Sweden, and Taiwan.
The models combine macro, fundamental, technical, and sentiment indicators to determine opportunities and identify risks in an objective, weight-of-the-evidence approach.
For more information, please contact:
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Day Hagan/Ned Davis Research
Smart Sector® International ETF
Symbol: SSXU
Strategy Description
The Smart Sector® International strategy combines three Ned Davis Research quantitative investment strategies: The Core International, Explore International, and the NDR Catastrophic Stop
The Process Is Based On The Weight Of The Evidence
Core Allocation
The fund begins by overweighting and underweighting the largest non-U.S. equity markets based on Ned Davis Research’s proprietary models.
Each of the models utilizes market-specific, weight-of-the-evidence composites of fundamental, economic, technical, and behavioral indicators to determine each area’s probability of outperforming the ACWI ex. U.S. Markets are weighted accordingly relative to benchmark weightings.
Explore Allocation
To select smaller markets, the fund uses a multi-factor technical ranking system to choose the top markets. The markets with the highest rankings split the non-Core model allocation equally.
When Market Risks Become Extraordinarily High — Reduce Your Portfolio Risk
The model remains fully invested unless the Ned Davis Research Catastrophic Sell Stop (CSS) model is triggered, whereupon the equity-invested position may be trimmed up to 50%.
The NDR Catastrophic Sell Stop model combines time-tested, objective indicators designed to identify periods of high risk for the global equity market. The model uses price-based, breadth, deviation from trend, fundamental, economic, interest rate, behavioral, and volatility-based indicator composites.
When Market Risks Return To Normal — Put Your Money Back To Work
When the NDR CSS model moves back to bullish levels, indicating lower risk, the strategy will reverse toward being fully invested.
Ned Davis Research Disclaimers
The data and analysis contained within are provided "as is" and without warranty of any kind, either express or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All performance measures do not reflect tax consequences, execution, commissions, and other trading costs, and as such investors should consult their tax advisors before making investment decisions, as well as realize that the past performance and results of the model are not a guarantee of future results. The Smart Sector® Strategy is not intended to be the primary basis for investment decisions and the usage of the model does not address the suitability of any particular in investment for any particular investor.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight of the evidence approach that fits their investment needs.
Disclosures
Past performance does not guarantee future results. No current or prospective client should assume future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.
Day Hagan Asset Management is registered as an investment adviser with the United States Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.
References to “NDR” throughout refer to Ned Davis Research, Inc. Clients engaging in this strategy will be advised by Day Hagan and will not have a contractual relationship with NDR. Day Hagan purchases signals from NDR, and Day Hagan is responsible for executing transactions on behalf of its clients and has discretion in how to implement the strategy.
NDR is a registered as an investment adviser with the Securities and Exchange Commission (SEC). NDR serves as the Signal Provider in connection with this strategy. The information provided here has not been approved or verified by the SEC or by any state or other authority. Additional information about NDR also is available on the SEC's website at https://www.adviserinfo.sec.gov/. This material is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or to participate in any trading strategy. NDR’s strategies, including the model discussed in this publication, are intended to be used only by sophisticated investment professionals.
There may be a potential tax implication with a rebalancing strategy. Re-balancing involves selling some positions and buying others, and this activity results in realized gains and losses for the positions that are sold. The performance calculations do not reflect the impact that paying taxes would have, and for taxable accounts, any taxable gains would reduce the performance on an after-tax basis. This reduction could be material to the overall performance of an actual trading account. NDR does not provide legal, tax or accounting advice. Please consult your tax advisor in connection with this material, before implementing such a strategy, and prior to any withdrawals that you make from your portfolio.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.
© 2023 Ned Davis Research, Inc. | © 2023 Day Hagan Asset Management, LLC
© Copyright Ned Davis Research, Inc. All Rights Reserved | These materials are historical and intended to be used only as examples, and do not necessarily reflect current views or advice of NDR or its representatives.
