What environment is the market currently in? The market sentiment provides us with valuable insight on where to focus the attention on – defensive or risk assets.
If we look at the charts of major indices, it’s pretty straight-forward – the prices head higher. Thus the market is in the uptrend. However, before previous stock crashes, prices grew likewise. So what’s the difference? Is the bullish trend in stocks legitimate, or it smells fishy, raising concerns about a bubble?
To find out, we ought to look under the market index surface to see what trends are developing in various sectors. Often the tendencies in certain sectors can give us a clue of what’s really happening.
Below is the performance comparison chart of the key US sectors (expressed as ETFs) representing the risk sentiment for the last three months.
From the chart above, you can see that Technology (XLK) and Communications (XLC) strongly outperform the broad market (SPY). At the same time, defensive sectors – Consumer Staples (XLP) and Utilities (XLU) – are far behind the SPY, giving us the message that investors are not interested in modest consistent returns but rather seek profits in more dynamic and risky sectors.
When the market overlooks “safe” assets but keeps betting on progressive, riskier companies, we usually see a healthy bullish trend.
The technological leadership of Israel
Along with the trend in Technology and Communications, we can see the strengthening of the economies that rely on technological leadership. Except for the US, countries like China, Taiwan and South Korea are among the growth leaders.
In the Middle East, Israel stands out in the technological advance. According to the World Economic Forum’s 2016-2017 Global Competitiveness Report, Israel is a world leader in innovation.
The stock market shows that Israel is taking advantage of the current trend driven by the innovative sectors.
EIS is the ETF, which tracks the MSCI Israel Market Index, outperforms the Technology benchmark index – Nasdaq (expressed with the QQQ ETF). Look at the chart below.
If we look at the EIS on an absolute basis, the ETF hasn’t done much for almost a decade. The market has broken out from the multiyear base and making fresh highs.
Investors can buy the ETF around 65 with the protective stops below 62 to ride the powerful breakout in Israeli equities.
Can the vaccine be a catalyst?
Israel can become one of the first countries that are immune to Covid-19. The Pfizer Inc. and BioNTech SE Covid-19 vaccines were 89.4% effective at preventing infections, according to the national immunization program results that started on December 20th.
The vaccine success, which is the first real-world evidence of how immunization can overcome the virus, might be the foundation that fueled the recent breakout in the Israeli market and may sustain further upward momentum for months to come.
How to be bullish on Israel in forex?
The forex market provides opportunities to get exposure to Israel by buying its local currency – the Israeli shekel (ILS). Let’s look at the technical picture of ILS against major safe-havens – USD and JPY. Below you can see monthly charts of USD/ILS and JPY/ILS.
Both pairs are in the long-term range, with USD/ILS breaking the major 3.4 support and piercing the 3.2 low. Investors can short USD/ILS with the protective stop above 3.4 and expect the pair to make a 0.6 move – roughly the height of the multiyear range.
JPY/ILS is consistently respecting 0.03, consolidating tighter to the support. If the market closes below 0.03 on Daily or Weekly timeframes, we can expect a powerful decline with the target below 0.02.
Due to the nature of Israel’s economy, the country benefits greatly from the global trend in innovative sectors. The vaccine’s success is another factor that can become a catalyst for the growth of the Israeli market. You can bet on Israel either through ETF or the Forex market.