S&P is Starting to Drag Against the World; Who's Going to Benefit?
Last September, I pointed out herethat the ratio between the S&P Composite and the MSCI World Stock ETF (SPY/ACWI) had reached a critical juncture and needed an immediate rally in order to avoid an important sell signal. That point has been flagged with the green arrow. As you can see, this relationship did not break down, but instead rallied. The subsequent advance was relatively weak, leading to the ratio selling off again. It has now violated both its 2016-20 extended breakout and 2018-2020 solid red support trendlines. Momentum is also under pressure, as all three KSTs are in a negative mode.
The pink-shaded areas point up previous examples when the long-term KST experienced a negative slope. Except for the false signal in 2015, such periods have been characterized with weak or rangebound activity. The situation is more serious now due to the two trendline breaks and the ratio being below its 65-week EMA. During that 2015 period, it was above.
A similar message is being transmitted from the ratio between the S&P and the Dow Jones World Index (SPY/$DJW) in Chart 2. This time, it's the Special K (SPK), which you can read about here, causing trouble. The chart demonstrates that SPK trendline violations, when confirmed by the price, usually offer reliable signals of multi-month reversals. The only negative combination, which occurred in 2017, was followed by a trading range, not a decline. That was due to the fact that the signal ran counter to the post-2008 linear uptrend. In the absence of evidence pointing to a secular reversal in this relationship, it's not impossible that the most recent signal will be followed by similar action. Consequently, we should be careful in drawing an overly bearish conclusion for US relative performance.
One reason for that lies in the fact that US equities have been largely powered by a handful of high-momentum technology stocks. Their influence is greatly reduced when the S&P is expressed as an equally-weighted index. Equal-weight indexes have generally underperformed since late 2016, but have come to life in the last couple of months, along with small-caps. That's reflected in Chart 3 with the post-July rally in the RSP/$DJW ratio. The long-term KSTis definitely in a declining mode, but that deterioration is far more advanced than the SPY/$DJW relationship. It's possible that the current short- and intermediate-term KST rallies now underway will have enough power to push the ratio above the green resistance trendline. All of this suggests that, if the US is going to maintain its long-term trend of superior performance, it won't be from high-flying technology, but more likely due to a change of leadership. Probable candidates would include small-cap and late cycle outperformers, such as basic industry and resource-sensitive issues.
Strong Breakouts are Taking Place Everywhere
Regardless of whether the US continues to win the relative performance game or not, prices look set to move much higher on a very wide global front. Chart 4 indicates that the Dow Jones World Index has decisively broken above a resistance trendline and is being accompanied by a rising long-term KST. Please note that this and the other accompanying monthly charts have been plotted with data for 11/27. However, in order to be "official" with an actual November month-end close, data for November 30 will be required. Don't forget, you can always click on these charts to automatically update them.
The Vanguard FTSE All-World ex-US ETF (VEU) has completed a right-angled broadening formation, a particularly bullish price pattern. It has also just experienced a bullish long-term KST.
Chart 6 demonstrates that KST buy signals for the stock/bond ratio in the US have invariably been bullish for equities. The thicker arrows show that stronger moves tend to come after recessions as opposed to growth slowdowns. That indicator is currently poised and ready to trigger another post-recession buy signal.
Mega International Breakouts are Underway
Finally, it's worth noting that several key countries and regions are either poised to experience a breakout or have done so already. For example, the SPDR STOXX Europe ETF, the SPEU, has just surpassed its 2007 and 2020 highs.
In Asia, we see a mega breakout by the Nikkei (Chart 8) above a multi-decade resistance trendline. China looks set to follow suit with a move above 3,500 for the Shanghai Composite (Chart 9). Note that its long-term KST is already in a bullish trend.
The iShares Emerging Market ETF (EEM), has powered through a 13-year resistance trendline in a pretty decisive way (Chart 10).
Finally, the commodity-sensitive Australian (Chart 11) and Canadian (Chart 12) ETFs have tentatively broken above mega-resistance trendlines.
All these breakouts are coming from multi-year trading ranges and are therefore likely to be followed by commensurate price moves on the upside. Breakouts can also be dangerous if they do not hold, so we need to be mindful of that, especially as a whipsaw would threaten the integrity of the various tentatively bullish long-term KSTs. However, we believe the odds of them being valid are high. That's because these breakouts are occurring on a very broad basis and are being supported by OECD leading global economic indicators, which are continuing to point north. To answer the question posed by the title "Who's going to benefit?", it looks like just about everyone!
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 Groupof Walnut Creek or its affiliates.
