With globalisation the financial markets are no more connected than ever. In days gone by the saying, “if the USA sneezes the rest of the world catches a cold” was the common line of thought. Certainly the markets have a degree of correlation and it can be useful to keep an eye on this to help us determine overall market risk. Stan Weinstein, author of Secrets to profiting in bull and bear markets notes that the strongest moves in the US market have been when the majority of markets around the world are in agreement. In earlier decades the main way to do this was to look separately at each of those markets to interpret the extent of the agreement. Today it is much simpler.
We can use the Vanguard FTSE All World Index, (VEU) which is an ETF designed to track the performance of the worlds markets excluding the USA. To this chart, (below) we add a 30 period moving average, seen as the smoother green line. The simple interpretation is that when price is above the moving average it’s a bullish sign and when it’s below it’s a bearish sign. Taking this into account, it is suggesting that we are in a bullish phase, and have been since April.
Looking at the period from mid 2012 to mid 2014 it can be seen that price was predominantly above the 30 period moving average and was therefore bullish. This was also a very good time for the Australian market, with strong gains in a number of sectors, but not surprisingly gains were harder to find in more recent times unless you know where to look.
It is also interesting to note that an extended period of bearishness started in July 2015, a date that I have referred to in previous articles regarding increased market risk. In those articles I used an Average True Range (ATR) indicator to determine market risk with similar principles. Price above the ATR signals bullishness and price below bearishness. More recently, price has remained above that indicator since April of this year also suggesting bullishness.
When trying to assess overall market risk, it is worth looking at several indicator as it leads to a “weight of evidence” line of logic. The two indicators discussed today are based on trend and momentum, and help us to form a view on the level of market risk. The next step is to weave that into a well thought out but simple to use investing plan.
David McCulloch is a market educator and consultant to Share Wealth Systems.