Courtesy of Dana Lyons
Perpetually under-performing international equity markets are testing critical support.
With the selloff in the U.S. stock market this week, it is easy for domestic investors to lose sight of one thing: it could be a lot worse. As in, one could be heavily exposed to international markets and subject to the disproportionate damage that has afflicted many of those markets for almost a decade now. For example, let’s look at the performance ratio between the MSCI Europe Australia & Far East Index, a.k.a., the “EAFE”, versus the S&P 500. After topping out in late 2007, the ratio has been on a relentless decline. And in the past few days, the ratio has dropped to a fresh all-time low, yet again.
This chart is just a reminder of 2 things. First, international equity markets have severely under-performed the U.S. for some time now, largely due to the terrific run in U.S. stocks. Secondly, while the trend will eventually reverse, it shows no sign of doing so imminently.
If we look at the EAFE in absolute terms, we find it at an important juncture in the context of its post-February intermediate-term rally. After bottoming in February, the index was able to break above its post-May 2015 Down trendline in April. This allowed it to pop higher by another 6% or so, temporarily. The EAFE has since dropped back down, testing the breakout point successfully in mid-May before resuming its short-term downtrend in the past few weeks. Currently, it is testing an arguably make-or-break level as it pertains to the survival of the post-February rally.
As the chart shows, the index is presently testing the confluence of A) the top of the broken post-2015 Down trendline and B) the 61.8% Fibonacci Retracement of the February-April bounce. If this area gives way, it will very likely be the nail in the coffin for the post-February rally. Thus, if these international markets wish to extend the bounce, they best get it going right here and now.
Consider this their wake up call.
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