Key Points

  • Trend and Momentum Continue to Favor the Prevailing Growth Themes…

  • ...Confirmed By Chaikin ETF Ratings Across Asset Classes

  • Earnings From AAPL, GOOGLE, AMZN and FB Halt the “Rotation” Trade

  • Treasuries Lead in Fixed Income but IG Corporates Are Climbing

  • Precious Metals Continue to Point to Rising Inflation as a Risk

Action Plan

The start of a new month is always a good time to evaluate the trends and momentum across the investment landscape (not just equities) to identify new opportunities or to determine if the existing themes remain in place. As August begins, it is largely the latter. Despite the drumbeat of narratives about the reversal of the growth trade and even some advocating for outperformance on the part of small cap value, the bigger picture trends have not changed. Stepping away from the day-to-day ebbs and flows, would yield a large yawn as it relates to market action of the prevailing trends.

Within the equity space, growth is still the place to be. In fixed income, long duration treasuries continue to carry the ball down the field (puck up the ice in honor of the return of NHL Hockey). In the alternative investment options, precious metals lead with gold and silver as the king and the queen of the ball. Finally, thematic investments (at least as I define them) are skewed toward innovation with a growth leaning (please let me know if there are other thematic investments that you find compelling as my list is certainly not inclusive).

Interestingly, there is reason to believe that these trends will persist further. There is more going on here than just momentum. These trends are also being confirmed by the Chaikin ETF ratings for the funds that broadly represent “the leadership” in each group as we will highlight in the pages below.

The strategic trends on which we have been and remain bullish largely remain in place. Within this framework, stock pickers can isolate the best opportunities as they are likely to be aided by the tailwind that these secular trends can provide.

Commentary

US Equities

The equity asset class continues to be dominated by the same growth themes that we have been highlighting for the past 17 months. The top four funds on the chart below are all growth-related as a matter of fact. Last week we pointed out that the “rotation” trade had likely run its course and that appears to be playing out especially following the better than expected earnings reports from the “Big Four” generals: GOOGL, AMZN, AAPL and FB.

As such we remain bullish on the theme and our view is unwavering at this point. There may come a time when a change is justified but we are not there yet.

The Invesco QQQ Trust (QQQ) leads the charge in the equity space and carries a Bullish ETF rating and traded at new all-time highs on a closing basis yesterday.

US Fixed Income

The song remains the same in fixed income space in the US as well. The prospect for a continuation of slowing global growth trends in conjunction with the Fed’s promise that they are not thinking about, thinking about, thinking about raising rates will likely keep a bid to treasuries for the foreseeable future. This lines up with our prevailing view of having exposure to treasuries within the context of a diversified portfolio. Where we are slightly off is in the view that investors should favor shorter duration though this is playing out more in the relative trends within the asset class as opposed to on an absolute basis. Our preferred exposures are still higher, they are just not up as much as the longer duration products.

Here we can see that the Pimco 25+ Year Zero Coupon Bond ETF (ZROZ) has a Very Bullish Chaikin Power Gauge ETF Rating and is trading above the rising long-term trend line.

Alternatives

The alternatives space is delivering our inflation message loud and clear. As we can see in the blended performance, the leaderboard is full of exposure to precious metals, in line with the bullish view that we have been sharing for the better part of the past four to six weeks. While we have made the case that the precious metals theme is extended in the near-term, it is a trend that we think has staying power in the intermediate to longer-term. Investors would be wise to thoughtfully look for opportunities to add exposure.

The Global X Silver Miners ETF (SIL) is the leader in this group and it holds a Very Bullish ETF rating as it trades near 52-week highs.

I have also been very local in my bullish view on the long-term prospects for digital assets as central banks around the globe race to debase their fiat currencies in the name asset price inflation. This is a theme that will likely continue to play out over years and decades with larger than normal (for traditional asset classes) bouts of volatility on the way.

Thematic

Innovation remains the name of the game in the thematic bucket of the investment landscape. But there is another common thread here, that at the risk of pounding the table once too often, lines up with our views on growth. After all, innovative ideas can be more risky because they imply a level of growth, often accelerating, when the new ideas begin to get adopted. This makes them compelling investments within the framework of a slowing growth world (our base case), however, if the idiosyncratic growth stories within each of the ideas does not pan out, these investments can see a disproportionate move to the downside. As always, make sure that your risk management process is sound.

The ARK Next Generation Internet ETF (ARKW) is an example of innovative growth. The fund has been bullish in our model since early April and has been leading the SPY since last November.

This list is not meant to be inclusive. If you have thematic investment ideas that you feel are compelling which I have missed here, please send them to me for inclusion in future analysis.

Dan Russo, CMT
Chief Market Strategist

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