US Breaking Out Against the World, But the Stocks Doing it May Surprise You!

Back in the opening week of the yearl I wrote an article entitled Four Charts and Four Themes of the First Half of 2021. Three of them - higher stocks, higher commodities and value starting to outperform growth - are so far on track, but my negative analysis concerning US equities versus of the world needs an update, or more accurately, some clarification. That's because a lot of it depends on what the meaning of the "US stock market" is, to adapt a famous Clintonian expression.

Normally, the S&P Composite is compared to a global measure, such as the MSCI World Stock ETF (ACWI) or the Dow Jones World Index ($DJW). We see that in Chart 1, where the $SPX is compared to the $DJW. A few weeks ago, the ratio broke below its bull market trendline. However it has now managed to rally back to the extended line and its 65-week EMA. If it can push through that resistance, the break will turn out to be false and we could see a repeat of the whipsaw break that developed in early 2018. That one was followed by a sharp rally. Arguing against such a possibility is the ratio's bearish long-term KST. This is partially offset by  the bullish short-term series and by the fact that its intermediate counterpart has begun to kink up. If an upside break is going to happen, now is as good a time as any to expect it.

One of the reasons the S&P has done so well compared to  the rest of the world can be laid at the feet of the tech sector. Chart 2 shows that this relative performance has been stalled since the spring of 2020, which has caused the long-term KST to roll over. A top has been formed in the ratio itself, which is now in the process of challenging its 65-week EMA. The newly minted short-term KST sell signal and the bearish intermediate series tell us that the ratio is at a make-or-break level.

Since the unweighted S&P (RSP) downplays the influence of high-flying technology, we can take US relative performance one step further by comparing it to the $DJW. This is shown in Chart 3, where you can see that the ratio has broken out from its 2019-2021 consolidation pattern, as flagged by the dashed line. It is currently at an all-time high. Note also that it is now above its 2016-2021 solid resistance trendline. The three KSTs are giving the breakout credibility, as they are all positive. The long-term series is especially noteworthy because it has just experienced a buy signal.

This positive action is also underscored by the Special K, which you can read about hereand which is plotted in Chart 4. Note how the 2015-2021 down trendline for the Special K has been decisively violated following a breakout from a small base. The ratio is obviously overstretched, as we can see from the reading in the daily KST. However, with recent breakouts being supported with positive momentum from the long-term KST and Special K, it is highly likely that the majority of S&P Stocks will outperform the world for the foreseeable future.

Keep a Close Eye on China

One of the countries the US is likely to outperform is China. Chart 5 shows that the Shanghai Composite recently experienced a false upside breakout above the 2015-2021 resistance trendline. This has now been confirmed by a rupture of the 2020-2021 dashed up trendline. The KST is not bearish, but the loss of upside momentum coming off the false upside breakout is likely to soon weigh on it.

This is important stuff, because false breakouts are usually followed by above-average moves in the opposite direction to the breakout. That conclusion is justified by the fact that participants, having positioned themselves incorrectly during the false break, now have to scramble to return to the right side of the market again.

Chart 6 shows recent action in greater detail. The first thing to notice is the fact that the 2021 high experienced a very weak reading in the 25-day ROC. Weak momentum at a new high is a sign of great technical vulnerability, when confirmed by price action. In this case, confirmation came from a violation of the two up trendlines for the Index and its ROC. Things are currently overdone on the downside, so some form of reflex rally is likely in the near future. Regardless, the ultimate outcome is likely to be lower prices for Chinese equities for a while.

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.