FOREIGN STOCKS ARE LEADING U.S. STOCKS LOWER -- EUROPE AND ASIA ARE ALREADY IN DOWNTRENDS -- THE ALL COUNTRY WORLD INDEX IS FALLING TO THE LOWEST LEVEL IN A YEAR -- THAT SUGGESTS THAT GLOBAL STOCKS ARE PEAKING -- THAT INCLUDES THE U.S.
FOREIGN STOCKS ARE LEADING THE U.S. LOWER... U.S. stocks are under pressure for a lot of reasons that have been described in previous messages. There's been the rotation over the last month out of economically-sensitive stock groups like cyclicals, industrials, energy, materials, and technology into defensive stock groups like consumer staples, utilities, and REITS. Then there are breakdowns in leading stock groups like small and midsize stocks as well as transportation stocks. This week is seeing more serious declines in banks and semiconductor stocks. Unfortunately, U.S. stocks are also starting to feel the pressure of falling foreign stocks. And that includes both developed and emerging markets. The red line in Chart 1 shows the MSCI Emerging Markets iShares (red line) already trading at the lowest level in a year while the S&P 500 (black bars) was hitting a record high at the end of September. Chart 2 shows a similar negative divergence between the MSCI EAFE iShares (blue line) and the S&P 500. Those are the biggest divergences since the start of 2016. Those big divergences are usually resolved by "convergence", which can be caused either by foreign stocks rising or U.S. stocks falling. So far, it's the latter.
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Chart 1
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Chart 2
EUROPEAN STOCKS FALL TO TWO-YEAR LOW... European stocks are already in a downtrend. The weekly bars in Chart 3 show the STOXX Europe 600 Index falling below its early 2018 lows to the lowest level in nearly two years. That's Europe's weakest performance since the last global upleg began at the start of 2016. Since stock prices are leading indicators of their respective economies, their recent breakdown is an early sign of weakening economies in Europe. And since major global stock markets usually trend in the same direction, that's not a good sign for the U.S.
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Chart 3
ASIAN EX-JAPAN ISHARES ARE ALSO TUMBLING ... The weekly bars in Chart 4 show the MSCI All Country Asia ex Japan iShares (AAXJ) falling to the lowest level since the spring of 2017. Its biggest markets are China (35%), South Korea (16%), Taiwan (13%), and Hong Kong (11%). The AAXJ is down more than -20% since its January peak which qualifies as a bear market. The AAXJ bottomed at the start of the 2016 along with Europe and the U.S. as the last upleg of the global bull market began. It now looks like that upleg has ended in most of Asia. Chart 3 suggests the same in Europe. And probably the rest of the world, including the U.S.
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Chart 4
ALL COUNTRY WORLD INDEX ISHARES HITS NEW LOW ... Chart 5 shows the MSCI All Country World Index iShares (ACWI) falling to the lowest level in a year on a closing basis. The ACWI is made up of global emerging and developed markets, which include the U.S. The recent drop below its early 2018 low suggests that the global stock uptrend is rolling over to the downside, and has probably peaked for this cycle. That's not good for the U.S. stock market either.
