This is a brief follow-up to my January 23 article (January 21 Instablog), "Emerging Markets Leading Global Markets Down, as They Did Going Up."
As shown in the second and third charts, U.S. stocks are significantly outperforming international stocks, due to:
- The greater strength of the U.S. economy and corporate profits relative to the EU (GDP growth barely above 0% in 4Q) and Japan (despite very misleading media headlines trying to fuel the current market, 4Q GDP nominal growth was a mere 1%, hyped real growth of 4.6% was due to adding back record price deflation of -3%, hardly a sign of a strong economy);
- U.S. "flight to safety" from troubled EU markets, due to concerns about PIIGS debt, U.S. equity markets have been gaining global relative strength since Oct, especially since the beginning of Dec, the latter is also when the dollar index also began a strong rally; and
- Concerns about monetary tightening (China, etc) and price inflation (India, etc) in emerging markets.
A key issue for SPX, closing yesterday at 1099.51, re-tracing a little over 50% of its January 19 (1150.45) to February 5 (1044.50) decline, is whether it will continue to rally in the face of weak international markets, or do the latter now need to at least stabilize somewhat?
E.g., materials and energy commodity stocks and ETFs have snapped back sharply the last three trading days; for them to continue to do so, the growth story (and chart) of their key end markets in EEM, emerging markets, must perhaps soon regain some of the luster that has been dampened recently by concerns about tightening.
So far, the EU has bought a little time on Greece, without saying or doing much of anything. Perhaps buying time for continuation of super easy money central bank policies to continue their positive impact on financial markets seems to be the fallback position of beleaguered politicians making it up as they go along.
We will probably see much more of this political impact on financial markets in 2010 (see my February 5 Instablog, "Major Negative Market Shift as Structural Issues Impact Cyclical"). For what I consider to be a very important discussion of why a potential market top takes a long time to form, and then will probably accelerate much more quickly than expected, please see my February 6 Instablog, "Significant New Evidence of Major Negative Global Shift.."
The first chart below is ACWI, an iShares ETF of the MSCI All Country World Index, which I use as my real-time proxy for global equities (the VT ETF gives a very similar chart). Far too many American investors and market analysts still usually use SPX as their major index. This is 2010, 18 months after the height of the Wall Street Crisis, not 1990, a year before the collapse of the Soviet Union. It is a global economy with global financial markets.
There is a lower low in this index, but perhaps not yet a lower high, that will depend on how high the current Feb high goes, needless to say a turndown from here would not be good for bulls. All 3 of the exponential moving averages (EMAs) have a negative slope for the first time since Mar 2009, with the 20-day EMA crossing below both the 50-day and 100-day.
To save space, I have not done so in this article, but I usually compare the relative strength of other key indexes and ETFs using ACWI, not SPX, as the base. It is very easy to do in Stockcharts.com, e.g chart SPY:ACWI to see SPY vs. ACWI (keeping in mind that the U.S. makes up 42% of ACWI).
left click on charts to enlarge
This chart shows SPY relative to EFA, an iShares ETF of the rest of the developed world, including Japan 22%, UK 21%, France 10%, Australia 8%, Switzerland 8%, Germany 8%. etc. SPY has been outperforming EFA since early last September, quite significantly so since early December.
The last time U.S. stocks greatly outperformed global equities was August - December 2008, when global financial markets, including the U.S., collapsed.
This chart shows the relative strength of QQQQ, essentially U.S. large cap tech stocks, to EEM, emerging markets. QQQQ has been outperforming since last October, accelerating since the beginning of December. Tech is among the highest U.S. sectors in terms of percent of profit from international operations, and much of tech growth recently has come from emerging markets.
Perhaps at some point such basic facts may start to impact QQQQ, but obviously not yet, as Wall Street is still currently enamored with iPhones (NASDAQ:AAPL) and a very modest U.S. corporate capex cycle. Once again, note the huge outperformance of QQQQ relative to EEM when global markets collapsed in August - December 2008.
With recent concerns over Greece and slow EU growth, it is obviously not a good-looking chart. There is both a marginally lower high and much lower low; price is well below all 3 EMAs, which are sloping down; and the 50-day EMA (red) just crossing below the 100-day EMA (green) for the first time since June 2008.
This is AAXJ, an iShares ETF which mirrors the MSCI All Country ex Japan Index, i.e., Asia growth (it started in August 2008). Hong Kong makes up 21%, S. Korea 19%, China 16%, Taiwan 15%, India 10%, etc. It's a better-looking chart than EZU, with the 50-day EMA still above 100-day EMA. But all 3 EMAs are now sloping down, and there is a lower low. Yesterday its price just closed back above its 100-day EMA, a small positive sign. It seems easier to rally Asia when China is closed for the week-long holiday.
This last 3-year chart is EEM, emerging markets. Again, there is now a lower low, but the 50-day EMA (red) is still above the 100-day EMA (green), and its closing price today was slightly above the latter. This is a key chart, since so much of global growth is coming from the countries and stocks represented in this ETF.
The above 3-year charts are a very simple format to see the main trends. Here is a simple format for a 1-year chart, e.g. AAXJ, to more closely identify key support/resistance levels, which looks to be about 54, halfway between 50 and 58.
Disclosure: No positions in stocks or ETFs mentioned.