2 overseas markets that may come alive
Many market pundits are
now recommending investors allocate more of their available capital towards
international markets. This comes after those markets have been
outperforming the S&P 500 for the past three years (or, since the bull market
began). Are they just picking up on this at the end of the run? In order to
determine this, we need to use one of my favorites, and one of the most robust,
tools: relative strength.
Relative strength is simply a ratio
that is derived by dividing the strength of what you want to measure by the S&P
500 Index and then plotting that number and connecting the dots. If the line is
rising then what you want to measure (in this case, international markets) is
outperforming on a relative basis and is expected to continue to outperform. If
the line is falling, then what you want to measure is under performing and is
expected to continue to do so on a relative basis. The performance of
international markets is also a function of currencies, but I will address that
at a later date.
You can find out a countries’ relative strength versus the S&P 500 Index in a
variety of ways such as using ETFs that invest in a foreign country or by simply
comparing foreign indexes (such as the Nikkei) versus the S&P 500 Index and then
plotting a relative strength line. If the foreign market(s) are not
outperforming the S&P 500 Index, then there is no need to shop internationally.
I looked at the following indexes and ETFs and
compared them on a relative basis versus the S&P 500: Dow Jones Australia Stock
(.DJAUD), Dow Jones Latin America (DJWD), Hong Kong Optional Index
(
HKO |
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PowerRating),
iShares Europe 350 Index Fund
(
IEV |
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Chart |
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PowerRating), Halter USX China Index
(
HXC |
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PowerRating), Japan
Index
(
JPN |
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PowerRating), CBOE Mexico Index
(
MEX |
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News |
PowerRating), iShares MSCI Canada Index Fund
(
EWC |
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News |
PowerRating),
and iShares MSCI Emerging Markets
(
EEM |
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PowerRating).
All of these indexes, or proxies for indexes,
have rising relative strength lines. So, yes, international is still a good
place to be investing and will be until those relative strength lines start
dipping. The
(
HKO |
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Chart |
News |
PowerRating) and
(
MEX |
Quote |
Chart |
News |
PowerRating) have not been performing as strongly as of
late, but their lines are still in an up-trend. The next step would be to
compare each of these indexes to each other to find out the best countries in
which to invest — the “best of the best†if you will. In my work, the two areas
that are consistently looking good are Latin America specifically and Emerging
Markets in general. At this very moment, both of those are looking a bit
overbought so it would not hurt to wait for a pullback to purchase anything in
these areas.
Sara Conway is a
registered representative at a well-known national firm. Her duties
involve managing money for affluent individuals on a discretionary basis.
Currently, she manages about $150 million using various tools of technical
analysis. Mrs. Conway is pursuing her Chartered Market Technician (CMT)
designation and is in the final leg of that pursuit. She uses the Point and
Figure Method as the basis for most of her investment and trading decisions, and
invests based on mostly intermediate and long-term trends. Mrs. Conway
graduated magna cum laude from East Carolina University with a BSBA in finance.