Balance Of Equity Power Continues To Shift Away From The US

• Contrary opinion argues against being too bearish on US equities
• US equities are breaking down against the world
• Emerging markets are emerging
• Metals driving north

Contrary opinion argues against being too bearish on US equities

The majority of the shorter-term indicators monitoring trends lasting between 4-6 weeks argue for an extension of the recent correction. From a contrary aspect though, there are grounds for suspecting that any additional corrective action is more likely to take the form of a trading range, rather than a sell-off. That’s because there have recently been several media stories drawing attention to the fact that the research departments of some major banks have been calling for a correction. Also, the Wall Street Journal featured an article on Friday focusing on “Bad Breadth”. It’s true that breadth has been a bit soft, but the bottom panel in Chart 1 shows that the NYSE Common Stock A/D Line has really been drifting lower since the beginning of the month. There are no major divergences of the kind often observed at an important top. The article also sights net new high data as being bearish because the plurality of highs over lows is at its lowest level since 2016. That is certainly true, but lowish numbers in a primary bull trend are usually indicative of an oversold market, which is more of a constructive sign. I am certainly not going to argue that these net new high numbers cannot drop some more. However, when the financial press gets into the business of calling corrections, the market usually disappoints, because such publicity usually indicates that bearish traders have already taken protective action. Also, I can think of few occasions if any, when a correction is widely publicized ahead of time. We will find out soon, because seasonally speaking, September is the weakest month of the year for equities. If prices are going much lower that would be the time to expect it to happen.

US equities are breaking down against the world

One thing that is apparent from Chart 1 is that my Global A/D Line is currently in new high territory, as it has recently been dragging up the MSCI World Stock ETF, the ACWI. This breadth series is calculated from the daily plurality of a basket of individual country funds rising or falling. Its strength therefore reflects a very broad global equity advance. This strong breadth certainly does not guarantee that the ACWI will continue to rally, but does indicate that the overall global technical structure has sound underpinnings.

Chart 1

Staying with Chart 1, the two brown dashed arrows point up that whilst the Global A/D Line has recently moved to a new high, a similar measure for NYSE Common Stocks has been trading lower. That hints at the international technical picture being stronger than that of the US.

Even so, Chart 2 tells us that the Global Diffusion Indicator (!PRDIFGLO), that monitors a universe of country funds in a positive trend, is still in a corrective mode. Previous sell signals this year have not amounted to much, so the current negative trend may translate into more of a trading range. In that respect, it is important that the ACWI remain above the red trend line (Chart 1) at around $66.

Chart 2

That view is also supported by price action in Charts 3 and 4. The first, compares the performance of the S&P Composite to that of the World ETF, the ACWI. This ratio was in a strong uptrend between 2011 and the end of 2016, but recently violated a major up trend line and the 12-month MA. Since the KST is also bearish the implication is that the US is no longer experiencing a trend of superior performance. That could mean a sideways trading range or an actual reversal.

Chart 3

In recent days Chart 4, which displays a similar ratio between the US and the Vanguard  FTSE Rest of the World ETF, the VEU, has just completed a 2-year top. This break signals that the trend will be down rather than sideways. Only a rally above the down-sloping, small green trend line at 4.8 would negate this scenario. In other words, these two charts are indicating that traders and investors should re-orient their portfolios away from the US.

Chart 4

Emerging markets are emerging

One area that looks bright, is emerging markets. In this respect, Chart 5 shows that the iShares MSCI Emerging Market ETF, the EEM, has just broken out from a 9-year consolidation formation, and this is being supported by the long-term KST. Moreover, the relative line has reversed a nearly 6-year down trend and completed a small base. The KST for relative action has also just started to cross its equilibrium line. Emerging markets have already had a good run, but these latest breakouts suggest that there is more to come.

Chart 5

One region that supports this idea is Latin America, where the iShares Latin America 40 ETN, the ILF, has also re-confirmed its early 2017 breakout. More important is the fact that the RS line has just violated its 2011-17 down trend line.

Chart 6

Metals driving north

Chart 7 compares the copper price to the Global X Copper Share ETF, the COPX, and the MSCI Chile ETF, the ECH. The ECH is being featured since Chile is a major copper exporter. Note that all three series have recently broken to the upside. This broad participation by two equity ETF’s and the metal itself offer a higher level of confidence that the breakouts are valid.

Chart 7

That’s also true for Chart 8, which shows that copper is not alone in its recent strength. It has been joined by Nickel, Tin and Aluminum.

Chart 8

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.