US Equities Are Breaking Out Against The World

• SPY experiences important relative breakouts
• World A/D Line unexpectedly breaks trend
• European and Emerging markets ETF’s experience major breakdowns

SPY experiences important relative breakouts

Earlier this morning I had the idea of writing about the relationship between the US and international markets, as this ratio usually does well when the dollar is rising and vice versa. It seemed to me that this relationship was on the verge of an upside breakout favoring the US. However, I vacillated and turned to other matters. By this afternoon though, things appeared to be moving, let’s say more dynamically in that direction, thereby revealing a compelling story of an important change in trend currently underway.

Chart 1 takes a look at three such relationships, the US versus the World, together with the US versus the rest of the world in the form of the MSCI Europe Australia Far East (EFA) and Vanguard Rest of the World ETF, the VEU.

Chart 1

All three series violated red dashed up trend lines in early 2017, which ushered in a period of rangebound activity. Now, two of the series have broken above green resistance trend lines, which means that the 2017-18 correction is probably over. I am looking for this sharp advance favoring the US to continue, and here’s why.

Chart 2 indicates that the SPY/VEU ratio recently broke down from a head and shoulders top, a development which should have set the scene for a horrendous drop in the relative fortunes of the US.

Chart 2

However, as Chart 3 tells us, that was not to be. What happened, was that the ratio quickly moved back above its dashed breakdown trend line and has now experienced a series of rising peaks and troughs. Not only did such action confirm that the false break, but the ratio reversed course by completing and breaking out from a reverse head and shoulders. That means that all those who were banking on a weaker relative US performance are now trapped and will be forced to change these positions.

Chart 3

This breakout is not only important in its own right, but has bullish connotations for the dollar itself, since the two usually move in a similar direction.

A similar conclusion can be drawn from Chart 4, where the ratio between US (Barclays Aggregate Bond Fund) and international (Barclays International Treasury) bonds (AGG/BWX) has also broken to the upside. Note that several previous joint breakouts in these series have served as useful signals for trend reversals in the Dollar Index itself.

Chart 4

World A/D Line unexpectedly breaks trend

Chart 5 compares the MSCI World ETF (ACWI) to my World A/D line, comprising the cumulative plurality of a basket of individual country funds. This series looked very promising earlier in the year, when it touched a new bull market high and the ACWI did not. However, it has now violated its 2016-18 up trend line and 50-day MA. Note that the latest plot does NOT include a calculation for the post Memorial Day Tuesday decline. Making things worse, is the fact that the oscillator for the A/D Line recently went bearish again from a very low level, which indicated a real lack of upside momentum. Finally, and perhaps most concerning of all, is the fact that the ETF itself is resting on its bull market trend line. If it drops through it that would confirm that the recent upside breakout above the green trend line was false. More to the point, false breakouts are often followed by above average moves in the opposite direction to the breakout.

Chart 5

European and Emerging markets ETF’s experience major breakdowns

Chart 6 features the European Monetary Union ETF, the EZU. Here we can see the formation and completion of a major top with a decisive drop below the neckline on Tuesday.

Chart 6

Chart 7 offers a similar scenario, but this time for the MSCI Emerging Markets ETF, the EEM. It’s also experiencing a KST sell signal. Things may not move as quickly as suggested by Charts 4 and 5 because both have left gaps, and gaps are usually filled fairly soon after being created. Nevertheless, these breakdowns, if they hold, represent a serious blow to the global technical structure.

Chart 7

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.