US Equities Reach Critical Point In Their Battle With The Rest Of The World

• The US versus the world
• Two reasons why US equities are likely to underperform
• What does the rest of the world say?

I have been writing for some time that, notwithstanding the inevitable but unpredictable near-term correction, the US market is in good technical shape and likely to work its way higher. However, the charts are starting to tell us that greener pastures may lie elsewhere. In other words, the US may advance, but other countries are better positioned to rally even more. Consequently, please don’t construe this article as being bearish on the US, just negative in a relative sense. A rising tide lifts all boats and global equities are experiencing a rising tide.

The US versus the world

Chart 1, for instance, shows that the ratio between the US (S&P Composite SPY) and the MSCI World ETF, the ACWI, recently violated a key up trendline capping 6-years or so, of superior US performance. Note that the ratio has also violated its 12-month MA. The KST is still declining and finds itself in a moderately overbought condition. These conditions do not argue for a quick turn-around to the upside.

Chart 1

Chart 2, featuring a weekly plot, tells us that the ratio is also below its 65-week EMA. However, the short-term KST is in a positive mode and the ratio has reached support in the form of a potential head and shoulders neckline. That holds out the possibility of a near-term advance and a re-crossing of the 65-week EMA. Bearing in mind the negative long-term momentum in Chart 1 though, it seems likely that this action would merely extend the trading range thereby delaying the ultimate breakdown.

Chart 2

Chart 3 shows that the relationship between the S&P and the Vanguard Rest of the World ETF, the VEU, has also reached a critical point in the form of another potential head and shoulders neckline. Note that the daily KST, in the lower window, is already in a declining mode, so the moment of truth is likely to unfold in the next few sessions.

Chart 3

Two reasons why US equities are likely to underperform

My expectation, is that the ratio is more likely to break to the downside, whether it’s sooner or later. There are two reasons. First this relationship moves reasonably closely to swings in the Dollar Index. Chart 4 argues that the Index is currently in a bear trend since it is below its 65-week EMA and other. It is also below other major MA’s, such as the 12-month span. Again, we are likely get some direction soon from the Dollar Index because it, like the ratio is above support in the form of the dashed horizontal trendline. Note that the KST for the Dollar Index has just started to re-accelerate to the downside.

Chart 4

What does the rest of the world say?

The second point, is that there are two sides to every ratio. That means that if an examination of some of the principal regions or categories of international stock ETF’s shows some pretty widespread and bullish patterns and trends, that would imply a breakdown in the SPY/ACWI ratio.

First, a charting note, as all the remaining charts feature the same “nirvana” template. I call it “nirvana” because it tells me pretty well everything I need to know about the long-term technical picture. Is the absolute price in an up trend? Is its long-term momentum bullish but not over-extended. Secondly, does the relative action for these same characteristics agree? If the security in question is experiencing a positive absolute trend, and it is also out-performing the market in question, what more do we need?

Let’s start with Asia. Chart 5 features the iShares Asia 50 (AIA), which tracks the largest Asian stocks. The price itself has just broken above a 9-year resistance trendline and this is being accompanied by a positive long-term KST. The third panel for this, and all the other following charts, features the relative action against the ACWI. That for the AIA has just completed a 4-year base. Note that the KST for relative action is also rising.

Chart 5

A different, but corroborating view for Asia comes from the MSCI Asia Ex Japan ETF, the AAXJ (Chart 6).  This series is at a record high, but more to the point has just experienced a breakout above a 6-year down trendline for relative action. The relative KST has just reversed to the upside.

Chart 6

The MSCI India ETF, the INP, has broken out from a multi-year base at a time when the KST has just started to turn up (Chart 7). Moreover, the RS line has just moved above a 6-year resistance trendline.  All these Asian relative breakouts should help push that SPY/ACWI ratio to the downside. But wait, as they say, there is more!

Chart 7

Chart 8 brings us to Europe, where the MSCI Eurozone ETF, the EZU, has also experienced a recent upside breakout. Note that the absolute KST, in the second window, nowhere close to being overextended. Relative action looks to be in the early stage of a long-term revival.

Chart 8

Emerging markets are not exactly a geographical region, but they do embrace many different types of economy.  The MSCI Emerging Markets ETF, the EEM, is another of those ETFs that is trading at a post 2010 high and is being supported by positive KST action. Relative action has been under pressure since 2011, but the upside trendline violation and the rising KST for relative action argues for a new uptrend.

Chart 9

Finally, Latin America, in the form of the iShares Latin America 40, has just broken out from a 3-year base. Relative action, though is still lagging but is right at its 6-year down trendline and 65-week EMA. The rising KST for relative action argues for an eventual break. Regardless of whether that happens, it seems to me that the world’s principal non-US areas are sprouting the kind of technical strength that will result in US equities underperforming for some time to come.

Chart 10

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.