U.S. STOCKS MAY BE GETTING TOO FAR AHEAD OF THE REST OF THE WORLD -- U.S. STOCKS USUALLY DO BETTER WHEN FOREIGN STOCKS ARE ALSO RISING -- U.S. STOCK RECORDS IN 2012 AND 2016 WERE SUPPORTED BY RISING FOREIGN SHARES
S&P 500 IS TESTING ITS JANUARY HIGH ... The black bars in Chart 1 show the S&P 500 nearing a test of its January high. That's an important test for it and the rest of the market. A test of a previous high is very important, especially in a bull market that's in its tenth year. There aren't a lot of technical reasons to suspect that the test won't be successful. One factor worth keeping an eye on, however, is that U.S. stocks may be getting too far ahead of foreign stocks. The red bars in Chart 1 show the Vanguard All-World ex-US ETF (VEU) lagging far behind the SPX. Think of it as a measure of global breadth. Just as our stock market is stronger when most stocks are rising, the global stock market is stronger when most of its stock markets are rising. The current absence of strong global participation could become a problem for the U.S. if it continues. Since the current bull market began in March 2009, U.S. stocks have done a lot better when foreign stocks were also rising.
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Chart 1
NINE YEAR BULL MARKET HAS BEEN GLOBAL... Chart 2 compares the S&P 500 to the Vanguard foreign ETF since the 2009 bottom nine years ago. One main lesson from the chart is both indexes bottomed at the same time in the spring of 2009, and have generally risen together since then. During those nine years, two global corrections took place. The first one lasted from 2011 into 2012 (first circle); and the second one during 2015 (second circle). In both cases, foreign stocks corrected more than in the states and took longer to resume their uptrends. Chart 2 also shows, however, that those previous upturns in foreign stocks (red bars) helped support upturns in the U.S. in 2009, 2012, and again during 2016. In the two prior corrections, the U.S. market hit new highs well before foreign stocks. What seemed to matter more, however, was that foreign stocks were at least rising again.
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Chart 2
COMPARISON OF LAST TWO CORRECTIONS... The weekly bars in Chart 3 compare U.S. and foreign stocks during the 2011/2012 correction. Both peaked together in the spring of 2011 and bottomed together that October. The S&P 500 hit a new record in spring 2012 at least a year before foreign stocks. Chart 3 shows, however, that foreign shares also rallied during 2012 to support the U.S. rally. Chart 4 shows a similar situation occurring during 2016. Both indexes bottomed together at the start of that year to end their 2015 correction. There again, the S&P 500 hit a new high first during that summer. But foreign shares also started rising to support the U.S rally that year and the next. The VEU hit a new record high in spring 2017. What seemed to matter in both instances wasn't that foreign stocks were slower to hit new records (which they were). But that foreign stocks were rising along with the U.S. Which brings us to the current divergence existing between U.S. and foreign stocks.
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Chart 3
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Chart 4
VANGUARD FTSE ALL-WORLD EX-US ETF IS STILL IN A DOWNTREND... Chart 5 shows the same Vanguard All-World ex-US ETF (VEU) still in a downtrend after peaking in January along with the U.S. stock market. [The VEU includes foreign developed and emerging stocks]. Not only does it remain well below its May/June peaks. It's also trading below its 200-day moving average. As I suggested yesterday, a stronger dollar has had a lot to do with that weaker foreign performance, since that usually draws more money into U.S. stocks. The stronger dollar also reflects higher interest rates here and a stronger economy. But there's a downside to that growing divergence between U.S. and foreign stocks. It raises the question of how long the global bull market can continue without more help from foreign markets. A "global" rally requires foreign participation. It's not necessary for foreign stocks to hit new records to support rising stocks here. But it would be a big help if they started rising again. A rally above the May peak in Chart 5 would be a good start. That's especially true with the S&P 500 nearing another possible record.
