Chart Of The Day: EM equities are under-performing but not yet oversold
We have been discussing Emerging Market equities (NYSE: EEM) for quite some time on the blog as well as in the newsletter. The equity index, which consists mainly of BRIC nations (NYSE: BKF) plus South Korea (NYSE: EWY), has been underperforming for quite some time now. The index, which is priced in US Dollars, peaked out in May 2011 together with commodities. It has been in a technical consolidation period for years, until it recently broke down.
While I do admit valuations are quite attractive, the tape continues to signal a downtrend for now. Traders could make a case that from the short term perspective, price is close to oversold (green line on the chart), however MSCI EM Index has not corrected anywhere near as much as it did during pervious major bottoms like October 1998, September 2001 or October 2008. The blue line in the chart above shows that we are yet to reach 1.5 standard deviation oversold levels over the last 12 months.
Chart Of The Day: S&P 500 has managed to stay above its 200 day moving average
A lot of technicians have been following the price of S&P 500 very closely in recent days. After a 5 consecutive day decline towards its 200 day moving average, it was make or break for the US equity market. So far so good, as the index managed to stage a 40 point rally (at the time of writing this). After trading above the 200 day MA for 183 out of the last 187 weeks, the question is: does S&P 500 have the legs to carry it towards new record highs or is this a short term bounce? The key to answering that question and future direction of the market lays with market breadth participation. In other words, despite a seven month sideways trading range, there is a lot more going on underneath the surface.
Chart Of The Day: Shanghai Composite hasn’t finished its downtrend just yet…
Chinese equities fell a whopping 8.5% in todays session, as the index unravelled after lunch in Shanghai. Unprecedented government intervention was bound to fail, as the index was actually working off its extreme oversold conditions with a multi-week bounce. In Hong Kong, the Chinese Enterprises Index sold off by almost 4.5%, while Hong Kong’s Hang Seng Index lost 3.2%.
As the chart above clearly shows, Chinese mainland shares are in the process of mean reversion towards its 200 day moving average. Firstly, let us remember that the Shanghai Composite went as far as 55% above its 200 MA into June of this year. That was an extremely overbought condition, similar to the peak in 2007. My view is that, whenever an asset trades above the mean for an extended period, it tends to spend considerable amount of time below that mean too.
Chart Of The Day: Emerging market equities are breaking down
Todays chart shows how South Korean exports, which continue to contract for several months in the row, closely correlate with MSCI Emerging Markets Index, which unsurprisingly is breaking down from its technical triangle pattern. South Korean export contractions have done a good job predicting many of the previous global slowdowns, as well as market corrections. These include: 1997 Asian Financial Crisis, 1998 LTCM & Russian Crisis; 2001 Tech Crash; 2008 Global Financial Crisis and 2011 Eurozone Crisis.
So what makes South Korean exports such a great barometer for the global economy and financial markets?
South Korea is an export powerhouse, focusing on both new and old economy. Major exports include semiconductors, petrochemicals, machinery, automobiles, ships, steel, LCD and wireless communication devices. Major trading partners are China (25 percent of total exports), ASEAN (14 percent), the United States (10 percent) and the European Union (9 percent). In my opinion, this makes it one of the best indicators to follow.
Chart Of The Day 1: Global equities participation is becoming very narrow
We continue to follow the global equity picture, as majority of the markets remain in correction. This week finished with a very weak close as the All Country World Index (NYSE: ACWI) broke down below its major uptrend line. While the S&P 500 (NYSE: SPY) managed to rally all the way back towards its bull market high last week, it has lost majority of those gains this week. At the same time, other equity regions around the world are still struggling.
There are now less than 25% of major global equity indices trading in an uptrend, or above their respective 200 day moving averages. This tells us two important points: a) participation is narrowing; and b) breadth isn’t yet at extreme oversold levels to consider buying equities.
Comparing this to Emerging Market equities (NYSE: EEM), we can see that participation is totally negative and we have a major technical break in place. While the market is oversold, readers need to remember that a prolonged period of consolidation can sometimes lead to powerful trending movement. The question is, how low could the EM Index go?
Chart Of The Day 2: Emerging market equities are currently breaking down
Chart Of The Day: US equities move towards new highs, still outperforming the globe
How strong is the global equity bull market? Today’s chart focuses on major global equity regions, all priced in US Dollars and not including dividend returns. Interestingly, while the US equities sit near all time record highs (NYSE: SPY), Emerging Market equities (NYSE: EEM) are on the verge of breaking its most important support zone in years. Finally, Eurozone equities (NYSE: FEZ) recently bounced of its support line as Greece was yet again bailed out (for the third time), but still remain of their highs set last year in June.
The most important observation an investor can make is that foreign equities (EU and EM) have not made any progress since October 2009, while majority of the gains in the All Country World Index (NYSE: ACWI) has come from the US equities outperformance. So to answer the question at the beginning of this post, the global equity market isn’t that strong or broad. Majority of the world continues to have anaemic growth (or contraction) and basically, global bull market is mainly driven by only one major region: United States.
Refocusing our attention on the very long term view, today I have an interesting chart to share with you. We are looking at the S&P 500’s nominal price together with a 17 year annualised return, not including dividends and not adjusted for inflation. The reason I like to focus solely on price without dividends and inflation is because: a) price is pure while total return can sometimes alter the technicals, and b) it is difficult to say what inflation adjusted price is as CPI measurements have been changed a handful of times since 1970s (and cannot be trusted).
If we closely obscure the chart in the post, we should be able to notice that throughout history S&P 500 had varied performance, also known as booms and busts. Booms are quite famous. These were the roaring 20s, swinging 60s and the technology 90s. Busts are just as memorable with famous panics in 1896, 1921, 1932, 1944 and 1982. During those years, S&P was either negative or flat over 17 years, creating one of the greatest buying opportunities. Once in a life time, generational buy signal. Could this happen again and under what scenario?
Chart Of The Day: In coming years S&P could correct producing negative 17 year return
Let us remember that S&P 500 peaked in 1,500 points in the year 2000 and that it currently trades at 2,120 points. The 17 year annualised return could turn negative if S&P 500 declined back towards 1,500 points by 2017. Assuming this was to happen, it would be a correction of 30% over the next 18 months. At the same time, S&P 500 could also continue to rise into 2016, before dropping 40% over the following 12 months. Let us remember that recessions occurred every 7 years or so, and by 2016 this recovery will be 7 years old.
It is important to understand that I am not predicting anything here, not a bullish nor a bearish call on the markets near term direction. It is basically just a case scenario and a thought process, which (if occurred) would create a once in a lifetime buying opportunity.
Chart Of The Day: 52 week new lows continue to dominate the market internals
Since finding a short term bottom on its 200 day moving average and its uptrend line in the first week of July, S&P 500 (NYSE: SPY) has managed to rally all the way back towards its bull market highs. One very important point I would like to make is, despite S&P 500 being only several points away from a new record, breadth participation has been very weak.
Consider that over the last three trading sessions NYSE breadth has registered 201, 301 and 214 new 52 week lows respectively. When we compare these numbers to 52 week new highs, we can see that bears continue to dominate the market internals. Today’s chart clearly displays that over one month, rising 52 week new lows continue to dominate new highs. In other words, while a handful of stocks keep pushing S&P higher, certain sectors of the index are still in a correction mode.
Chart Of The Day: Hedge funds are extremely net short New Zealand Dollar
After being one of the strongest performing majors in the world, the New Zealand currency is now going through an epic crash. Peaking out just above 88 cents against its US Dollar counterpart, the Kiwi has been in a free fall for the last 12 months, losing a quarter of its value. This is a staggering number for an important currency of this size.
Technically, major support level at 67 cents (dating all the way back to 2010) did not hold the crash as investors continue to dump the South Pacific currency. Interestingly, hedge funds and other speculators have piled into bearish bets, holding as much as 1.3 billion dollars of net short contracts – a record position. From a contrary point of view, this could signal selling exhuastion is approaching and a rebound in form of a short squeeze might be around the corner.
Gold mining stocks are oversold. That goes without saying. Yesterday we looked at the distance Gold & Silver mining index traded below its 200 day moving average. Today we look at the 3 month rolling performance for the index. As of the current price, precious metals mining index is has lost over 30% in the last 3 months and almost 50% in the last 12 months (not shown in the chart below). After such a long bear market, which has already dropped by a staggering amount, the recent sell off just adds fuel to fire for the Gold bugs. And while more oversold levels have occurred throughout history, the current one still goes down as a mini-panic. Basically, the speed of the fall has created a 2 standard deviations selling event.
Chart Of The Day: Gold miners three month performance is down 30%!!!