US Equities Break Out Against The Rest Of The World

• The SPY/EFA Ratio Completes an Inverse Head-and-Shoulders
• SPY/EFA Breakout also Bullish for the Dollar
• The Euro, Swiss Franc and Yen
• China Bucks the Flow

The SPY/EFA Ratio Completes an Inverse Head-and-Shoulders

Yesterday’s all-time new high in the S&P was well documented by the media, but what did not receive any attention was the fact that the SPY also reached a new high-water mark relative to the MSCI Europe Australia Far East ETF, a.k.a. the rest of the world. You can see that from Chart 1, where the ratio has broken out from a consolidation reverse head-and-shoulders. The RSI looks a little overstretched, but that does not necessarily translate into weakness, as you can see from the two green arrows following the 2018 breakout. In any event, the daily KST has just gone bullish and is by no means overbought.

Chart 1

Chart 2 shows that the short-term KST, calculated from weekly data, has just started to turn up again. However, it is not officially bullish, as it has yet to cross above its EMA. The slower-moving intermediate series, though, has experienced a marginal buy signal. The obvious investment implication from this breakout is for a continued superior performance by the US and a general downplaying of international exposure.

Chart 2

SPY/EFA Breakout also Bullish for the Dollar

Chart 3 shows another implication coming from the breakout, that being a bullish US Dollar. Recent price action shows that the SPY and EFA usually move in sympathy with each other. When investors have confidence in the dollar they tend to buy US equities, which stimulates their prices; alternatively, if international investors like US equities, they convert their currency into dollars in order to buy them. Regardless of the rationale, Chart 3 shows that, when it is possible to construct trend lines for both series and they are jointly violated, an important move usually follows for both the Dollar and the relationship.

Chart 3

A lot of people think that the trend of US interest rates has an important effect on the course of the Dollar, arguing that rising interest rates attract buyers and vice versa. However, this rationale does not explain why the Dollar and, say, the 10-year yield often move in different directions. A more practical approach compares the performance of US to non-US government bonds. One way of approaching this dilemma is to compare the performance of the iShares US Aggregate Bond ETF with that of the Barclays International Treasury Bond ETF - the AGG versus the BWX. Chart 4 compares this ratio to the Dollar Index.

Chart 4

Once again, it’s not a perfect fit, but the two series are sufficiently connected that a violation of the two trend lines results in a worthwhile Dollar move in both directions. The trend line for the bond ratio has already been ruptured, but not the line for the Dollar, though it’s really, really close.

The Euro, Swiss Franc and Yen

On Tuesday, the Index’s heaviest weighted currency, the Euro, experienced a tentative breakdown below its 2018-2019 support trend line. In addition, the daily KST has started to flatten. I wouldn’t call this evidence decisive, but any additional weakness will be. Let’s say a daily Euro close under 111?

Chart 5

Chart 6 shows that the lead is already being taken by the Swiss Franc, which has decisively broken down from its 2017-2019 consolidation head and shoulders. Note that the Special K (read about it here) is below its signal line and has been experiencing a series of declining peaks and troughs since early 2017. The tentative break in the red Special K support trend line certainly does not help.

Chart 6

The technical position of the Yen is more complex, as we can see from Chart 7. That’s because the currency is caught between two converging trend lines. Also, the Special K has gone flat. A drop below the small red support trend line would be negative, as such action would also push it below its signal line. If that proves to be the case, I would expect the 2017-2019 support trend line for the Yen itself to be violated. Right now, the Yen is too close to call.

Chart 7

China Bucks the Flow

The US may be outperforming the rest of the world, but China is outperforming both. This is shown in Chart 8, where the Deutsche Trackers CSI China 300 A-Share ETF (ASHR) is featured. ASHR is in a bull trend, as it is trading above its 65-week EMA. However, the price is currently running into resistance in the form of its 2015-19 bear market trend line. That probably means some corrective action will develop in the period ahead.

However, the relative line to the S&P Composite recently experienced a decisive violation of its bear market trend line, a positive 65-week EMA crossover and a bullish relative long-term KST buy signal. All of that should mean that Chinese equities have just begun a period of superior performance against the US and, therefore, the rest of the world.

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.