Exchange traded fund (ETF) issuer Reality Shares anticipates that the second-longest bull market in history is likely to be over and a significant sell-off within the next three to six months is extremely likely, based on its Guard Indicator turning negative on 9 November.
The indicator looks at all sectors in the S&P 500, and if at least three show signs of breaching both the volatility and momentum trigger thresholds, it signals a potential bear market.
Four market sectors have officially turned negative.
The utilities sector turned negative on 2 November, down 13 per cent from its peak, followed by the consumer staples sector on 8 November After the market closed on 9 November, real estate became the third sector to turn negative, shortly followed by the healthcare sector on 18 November.
“Over the past 17 years, we've seen bearish markets during three separate periods: September 1999 to May 2003, January 2008 to July 2009 and September 2015 to May 2016,” says Eric Ervin, CEO of Reality Shares. “The average return of the S&P 500 during those three periods was negative 18.41 per cent. These are the market scenarios the Guard Indicator with its rules-based methodology was created to detect, alerting investors to potential increases in market volatility and significant market downturns.”
The indicator is also signalling short-term weakness for the telecommunications and consumer discretionary sectors.
“As a result of the current low interest environment, yield-thirsty investors piled cash into these sectors in the hopes of generating income – thus creating a dangerous bubble that is on the cusp of bursting,” Ervin says. “The problem with owning these stocks strictly for higher yield is that prior sector outperformance was not supported by underlying corporate earnings. Should earnings decline, yield-chasing investors may be subject to dividend cuts as these sectors become more overvalued.”
When the indicator suggests the potential for a broader market decline, the Reality Shares GARD ETF triggers its dynamic hedging strategy and automatically transitions to a long/short weighting allocation to reduce the impact of market downturns. Today, the ETF is 50 per cent long expected dividend growers, and 50 per cent short expected dividend cutters.