The Rest of the World May be About to Beat US Equities for a While
- Europe and Emerging Market equities positioned to move higher.
- Philippine ETF breaks to the upside.
- Silver breaks convincingly to the upside.
- Gold breaks out against US equities.
US versus the World
The trend favoring US equities over most of the rest of the world, may be in the process of changing, at least for a while. Chart 1 shows the rising trend of the ratio between the S&P and MSCI Europe Australia Far East ETF (SPY/EFA). The long-term KST in the lower window is still rising and the ratio itself remains above its 200-day MA, which indicates that the primary trend of this relationship remains an upward one. However, markets rarely move in straight lines and there is no doubt that the price remains stretched above its 200-day MA, despite a recent correction. That decline has also resulted in a short-term KST sell signal and the violation of a 6-month up trendline. The two signals taken together suggest that the recent high will remain intact for a while. Corrections in strong up trends are usually short and sharp, often reaching their actual lows fairly early in the process, so don’t be surprised in the event that some volatility in this relationship develops.
Chart 1
This ratio follows the course of the US Dollar ($USD), sometimes closely at other times less so. Chart 2 shows a comparison of recent price action, so could that mean that we are about to see a correction in the dollar?
Chart 2
The Dollar
Chart 3 features the Dollar Index ($USD) along with a diffusion indicator (!PRDIFCUR) monitoring a basket of dollar cross rates in a positive trend. For the first time since the bull market began this diffusion series has started to reverse to the downside. It’s still a tentative reversal, so we should not read too much into it. The ECB is expected to make some form of QE announcement on Thursday, which should pressure the euro and boost the dollar. However, much, if not all of this dollar related good news has most probably been factored into the price already. Unless European central bank action is far and above what the market is expecting (€500-650 billion), it’s likely that the dollar would respond in a perverse way by declining on the news as traders take profits since their expectations will have been realized.
Chart 3
MSCI Europe Australia Far East ETF (EFA)
Bearing in mind that the EFA has recently been trading inversely with the dollar, that could mean that its recent breakdown, shown in Chart 4, could turn out to be a whipsaw. This possibility is based on the fact that the price is marginally above the breakdown point. The weekly KST is still declining but its more sensitive counterpart in Chart 5 has started to rise. Finally, volume has expanded on the rally after having bullishly contracted at the last two lows at B and C. Of course we would need to see some kind of trend confirmation from the price, and that that would come with a break above the green down trendline at just above $62. At this point I would expect a short-term rally, not a new bull market, as the long-term KST in Chart 4 is still declining and the price itself is below its 65-week EMA.
Chart 4
Chart 5
Europe and EM Equities
The Europe Top 350 (IEV) and the Emerging Market ETF (EEM) have both been suffering recently. In the last few days though, they have shown some resiliency to downside pressures. Chart 6 features the S&P Europe 350 ETF, the IEV compared to its diffusion indicator (!PRDIFEUR) monitoring a basket of European ETF’s in a positive trend. Right now it’s still bearish but is in a deeply oversold condition. The arrows show that when a reversal does take place this is usually followed by a decent short-term rally. Last September’s arrow has been dashed because it indicated a false positive. Chart 7 shows the MSCI Emerging Markets ETF, the EEM. As you can see the Emerging Market diffusion indicator has already moved into a bullish mode. All that is required is for a break by the price to confirm, and that would come with a move above the $40 area.
Chart 6
Chart 7
One market that looks particularly interesting is the Philippine ETF (EPHE) as the price has broken out on both an absolute and relative basis. It does not hurt that both KSTs are in a rising and subdued mode, thereby suggesting lots of unrealized upside potential.
Chart 8
Silver and Gold
We talked about the breakout in gold in the previous issue. That breakout has now been confirmed by the Silver Tracking ETF (SLV), featured in Chart 9. A few weeks ago the white metal looked as if it was in the process of completing a small bearish head and shoulders (see lower window). However, that theory was completely quashed on Friday as the price re-confirmed its recent break above the green trendline. Long-term, silver has broken down from a multi-year top, but for the moment the line of least resistance is an upward one, a view that is certainly supported by a rising but not overextended short-term KST.
Chart 9
Gold has also broken out more convincingly in the last few days, but perhaps just as important, Chart 11 indicates that the NYSE Composite/Gold ratio has broken in favor of stocks. Since both KSTs are positive I am looking for the ratio to regain a serious amount of the ground lost by gold in the last few years.
Chart 10
Chart 11
Commodities
I have not commented on the Commodities Tracking Index ETF (DBC) for a while because the chart has been in a slow but pervasive bear trend. In recent days the number of commodities registering net new lows on a 10-day basis (!PRNNHCO10) has been shrinking, and that’s a good sign. However, calling a reversal is a fool’s errand at this point, because there are no meaningful trendlines that can be drawn that are even remotely near the price. I have put one in the chart but that is currently around $20 compared to a current price in the $17.50 vicinity.
Chart 12
Good luck and good charting,
Martin Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.
