Is It Time To Emphasize Overseas Equities?

• Gauging the trend between the US and the rest of the world
• Relative performance of the US is largely dependent on the direction of the Dollar
• Special K is close to a relative sell signal for the US
• What does “The rest of the world” look like?
• A few comments on Gold

Gauging the trend between the US and the rest of the world

Since the depth of the financial crisis there have been ups and downs, but generally speaking it has made sense to emphasis US over non-US equities. You can see this from the persistent zig zag to the upside in Chart 1, which displays the ratio of the US(S&P 500) stock market to the MSCI World Ex-US Index. The chart also demonstrates the futility of trying to go against the prevailing secular trend, as each of the long-term KST buy signals during the 1999-2008 secular bear (for the US) ended in tears. The sell signals during the 2008-2017 secular advance experienced a similar fate. All secular trends though, eventually come to an end. This raises the question as to whether the most recent sell signal will turn out to be the latest in a string of counter-secular ones. Alternatively, it could be the first in a new secular downtrend or trading range. The simple answer, is that it’s too early to say. After all, the ratio is still above its 2011-2017 red up trendline and also above its 12-month MA. Moreover, rarely if ever, are we presented with signals of a secular reversal within 2-3-months of the final turning point.

Chart 1

Relative performance of the US is largely dependent on the direction of the Dollar

Chart 2 shows the close correlation between the fortunes of the ratio of the US versus the Dow World Stock Index ($DJW) and the US Dollar Index ($USD). In this respect the shaded areas show important periods when the two series diverged for an extended period.  By and large though, most of the chart remains in white, indicating the closeness of this relationship. The ratio is currently right at its 2012-17 up trendline and 12-month MA. The trend remains up, but barely so. Note also, that the long-term KST, having gone bearish again, is now right at its 2007-17 secular up trendline. The previous secular reversal in the 2007-8 period was signaled by a violation of the 1998-2007 down trendline, so we could be at the point where another secular reversal is at hand.

Chart 2

Special K is close to a relative sell signal for the US

Finally, Chart 3 compares the ratio to its Special K (SOK) indicator. This is a long-term momentum series that often peaks and troughs close to the turning point in the price that is being monitored. In the case of strong and persistent secular trends though, the SPK usually diverges negatively with the price. That’s certainly the case in the current situation since the SPK has experienced a series of 5 lower peaks in the face of 5 higher ones for the ratio itself. These instances have been flagged by the numbers featured in the chart.

Normally we like to see joint trendline breaks by the SPK and the price, in a similar manner to the July 2011 upside breakout. That way price and momentum are in gear, usually resulting in a stronger and more valid signal of a major trend reversal.  The violation of the red dashed up trendline for the SPK shows that the momentum series has already done its part, but we really need the 2013-17 trendline for the ratio itself to confirm with a violation of its own. If so, a violation of the horizontal solid red trendline would be likely and that would also result in a completion of a 6-year top in the SPK. A test of that line is already well underway and likely to succeed. This view is based on the fact that the short-term KST, in the bottom panel, is not yet oversold, thereby leaving the possibility of further downside action.

Chart 3

What does “The rest of the world” look like?

So far our analysis has focused on the relative performance for the rest of the world. The term “relative” only means that A is likely to outperform B. It says nothing about whether the absolute price of B either party will rise or fall. Chart 4 therefore shows the long-term technical picture for the MSCI World (ex US) Index from an absolute price perspective. It has recently broken out from a 6-month inverse head and shoulders, crossed above its 12-month MA, which is now rising and experienced a long-term KST buy signal. That places it in the bullish camp in my view and is certainly set to challenge its 2008-17 secular down trendline at around 1850.

Chart 4

I’ll be covering which countries look the most interesting later in the week, but for now I would like to close with a few comments on Gold as we are approaching a potentially important inflexion point.

A few comments on Gold

Chart 5 shows that the price of Gold and SPK both experienced major breakouts in late 2015, and this along with a positive 200-day MA cross signaled a bull market. This action was later cancelled by the completion of a head and shoulders top for both series and a drop below the SPK’s signal line and the 200-day MA for the price. It may turn out that these bear signals and that the whole 2013-17 price action will turn out to be a giant base and a launching pad to higher prices. That would mean that 2016’s bear action was a cruel whipsaw.  Until those MA’s are crossed positively though, the indications are for a bear market.

Chart 5

There are several factors worth following to see whether the current bear indications can turn into bullish characteristics. First, the 14-day RSI for the Gold Trust (GLD) has reached the 70 overbought level. If the price can continue to rally in the face of this it will represent a bull market sign, as was the case for the two red arrows in the green (bull market) shading.

Chart 6

Second, it would be nice to see the ratio between the Gold Miners ETF (GDX) and the GLD break above the resistance trendline in Chart 7. That would indicate that the mining company shares are outperforming the metal, which is usually a positive sign.

Chart 7

In a similar vein, Gold bull markets seem to be characterized by junior gold miners outperforming more senior companies. That’s the GDXJ/GDX ratio in Chart 8. Right now it’s doing its best to complete a base. If so, that would also be a positive sign for the yellow metal. That’s because it would indicate that more money is flowing into the more speculative juniors and therefore a sign that Gold investors in general were growing in confidence.

Chart 8

Please remember if you want to follow these charts you can update any of them by clicking on them.

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 of Walnut Creek or its affiliates.