The World Order May Be Changing

• The S&P 500 versus the world
• If things go against the US, where would be a good place to be?
• A true contrarian play

The S&P 500 versus the world

For several years the US stock market has been outperforming the rest of the world in a fairly robust fashion. That trend is still very much in force but has started to show some cracks. Concurrently, a few individual equity markets have begun show improving relative action. If, as and when the trend favoring the US starts to reverse, those markets that are already showing promise should be amongst the best performing.

Please note that all the markets I’ll be considering are represented by ETF’s. That means everything is expressed in US dollars, so we get an accurate comparison. Were we to use markets expressed in local currencies the analysis would be subject to misleading distortions due to currency movements.

The center panel of Chart 1 compares the S&P 500 to the Global Dow, where you can see that since the mid-1990’s, the ratio has been subject to three large swings, two up and one down. Due to the extended linear nature of these moves, counter-secular KST signals have not been particularly helpful, except when confirmed by a trend break. In the current situation we see a negative looking KST but no trend break as yet. That would come with a month-end close below the red trend line at around 6.6.  You may have noticed that the 12-month MA is barely visible because it’s right at the trendlines. That emphasizes the significance of the two as the MA and trendline reinforce each other as a crucial support zone. Note also, that previous breaks all encountered the MA and trendline in the same vicinity.  Conclusion, the trend still favors the US but watch that 6.6 level like a hawk, because once that gives the ratio is either likely to enter a trading range or a relative bear market for the US.

You can also see that this relationship moves very closely with the Dollar Index, featured in the top window. It’s not an exact fit because the ratio has a slight leading tendency. However, when both series move simultaneously in the same direction they reinforce each other.

Chart 1

Chart 2 shows some technical weakness on behalf of the ratio, as the Special K (SPK) in the center panel has violated a key up trendline and completed a small top. The SPK is also below its MA, which is used as a benchmark for objectively determining primary bull and bear markets. You can see that the 200-day MA and 2015-16 (dashed) up trendline are both in the 6.7 area. The daily KST in the bottom window is in a bearish mode, so it’s quite possible that we might see a breakdown in the ratio during the course of this current correction.

Chart 2

If things go against the US, where would be a good place to be?

All the remaining charts will be featuring, what I call my “Nirvana” template. I call it that because it tells me most of the long-term technical information that I need to know in one chart. It’s split into four panels starting with the price and long-term KST. The two lower windows express the same concepts, but for relative action against the S&P. Therefore, The template provides us with a view not only on when to buy but also what to purchase.

Chart 3 starts off with the European Union (EZU). Its price is right at its 65-week EMA and the KST is still bearish. If we are going to see an extension to the current worldwide rally, which seems likely, then this part of the EZU chart will most likely turn bullish in the near future. However, since the point of this exercise is to find better acting relative strength lines we have to pass on European stocks in general. That’s because the EZU RS line recently dropped to a new bear market low under the context of a still bearish long-term KST for relative action. That may well change, but right now it looks like a place to avoid.

Chart 3

Chart 4 takes us to Asia with the Vanguard FTSE Pacific ETF, the VPL. Here we see a more encouraging picture since both the price and RS lines have broken to the upside and are above their respective 65-week EMA’s. The two KSTs have also recently gone bullish for an all-around positive picture. The question then relates as to which Asian countries look to be the most promising?

Chart 4

Many Asian countries fall under the  “emerging” label, so Chart 5 plots the MSCI Emerging Markets ETF, the EEM. Since all the indicators are in a rising trend above their moving averages the emerging space reflects a universally positive combination.

Chart 5

There are several emerging Asian ETF’s worth considering, but I am just featuring two here, Indonesia (IDX) in Chart 6 and Thailand (THD) in Chart 7. Thailand looks positive overall but is facing some resistance in the form of a major down trendline.

Chart 6

Chart 7

Latin America also contains several emerging countries. In that respect, the Latin America 40 (ILF) has also begun to break to the upside with the support of both KSTs. Drilling down to individual countries returns Chile (ECH) and Argentina (ARGT). Argentina looks especially interesting because it has broken out of a huge base, again supported by KST and RS action.

Chart 8

Chart 9

Chart 10

Australia (EWA) falls under Asia but not the emerging category. Nevertheless, its chart looks compelling as we can see an absolute and relative breakout accompanied by both long-term KSTs.

Chart 11

A true contrarian play

Finally, for the bargain hunters, why not look at Nigeria in the form of the NGE. It’s lost about 75% of its value since mid-2014. With new price and relative strength lows this week, and two bearish KSTs there are certainly no technical signs of a turnaround. Sometime in the future there will be, but in the meantime the purchasing process is somewhat like trying to catch a falling knife.

Chart 12

Good luck and good charting,
Martin J. 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.