Will International Stocks Follow the US Higher?

With US equities holding new high territory and leading most of the rest of the world higher there is a clear bullish bias among market participants.

Taking a look around the globe will identify leading and lagging international markets based on their current performance.

United Kingdom

For example, while the United Kingdom (UK) has been in a prolonged uptrend since 2009 its ability to outperform the US has lagged. That is, on a monthly basis the London Financial Times Index (FAW) has underperformed the S&P 500 (SPX) on a relative basis and formed a steady downtrend since the recovery began in 2009.

In other words, investors have been rewarded for overweighting US stocks versus UK equities during this time frame.

However, there are some developments in the Relative Strength chart which may imply that the UK could start outperforming the US. For instance, during mid-2016 FAW displayed superior performance relative to SPX and penetrated the downtrend line that was respected up until that point.

Additionally, positive divergence may be developing in the Relative Strength Index (RSI) as well as the Moving Average Convergence Divergence (MACD) indicator. Positive divergence can foretell an impending improvement in a security’s absolute performance or the relative performance of particular paired investments.

Ultimately, it would be ideal to see follow-through from the RS line driven by underlying price strength in FAW versus SPX in order to encourage an overweight bias to the U.K. in the near term.

Asian Markets

Elsewhere, two key Asian equity markets are following the US higher.

For example, Japan’s Nikkei 225 (NIKK) has displayed resiliency in its price action. Looking at the daily chart, we can see range bound action from May 2017 through the beginning of September 2017 until the price gapped up through 20,000 recently. Since then the follow-through has been impressive as the steady advance in NIKK registered an overbought reading on its RSI.

Additionally, the breakout last month cleared previous resistance from 2015 displayed on the monthly chart.

For further confirmation of the move, higher traders should watch for NIKK to extend its overbought reading in RSI. Otherwise, any negative divergence that develops could be seen as a reason to sell or decrease exposure to this market.

Elsewhere in Asia, the Hong Kong Hang Seng Index (HSI) daily chart shows an orderly series of higher lows and higher highs representing a healthy uptrend. Additionally, the slope of both the 50-day Simple Moving Average (50SMA) and 200SMA remain up. The 50SMA has provided two key support levels before the price trended higher for a period of time.

However, the daily RSI is displaying negative divergence while the price has made new highs. Traders should keep an eye on price action as it moves in to test support at the 50SMA while internal price strength as measured by RSI may be waning.

Indian Market

One of the international markets offering performance similar to the US is India’s Nifty 50 Index (NIFTY). Since 2009 NIFTY has rebounded in stride with US stocks in a methodical long-term uptrend.

Since August 2017 NIFTY traded sideways before its breakout last week over 10,200. After a period of consolidation, a move higher like this should open the door for further gains to the long side.

As of now, there is nothing out of the ordinary or signs of internal price weakness for India’s NIFTY. Accordingly, much like US investors, participants in the Indian markets will be best served to stay long NIFTY equities from a strategic perspective.

Conclusion

When looking at the markets in the context of a coin flipping experiment, Victor Haghani of Long-Term Capital Management has said: “There are very few ways to trade a biased coin in the markets, but beta may be the closest thing.” In other words, simply being long the markets when in a multi-year uptrend is one of the easiest ways for investors and traders to harvest equity risk premium.

The downside must always be managed and considered, but for the time being as most markets continue to trend up your trading strategy should favor a long-bias toward equities in the US and other select markets.

John DiRico is a trading and investment professional focused on technical analysis as well as alternative investment strategies. Additionally, he is the founder of the blog “A Discounted View” where he offers his observations on markets based on industry experience and topics covered in the Chartered Market Technician (CMT) curriculum. Please feel free to connect.