The U.S. Versus the World
The above title is not about which countries are winning at the Tokyo Summer Olympic Games or who have the most medals. It refers to the U.S. stocks (SPX Index) performance against international stocks (MSCI World – ex USA Index).
The Covid-19 pandemic has impacted everyone, but domestic equities continue to outperform global peers. The relative outperformance is not new as SPX has outperformed MSCI World ex-USA Index (MSWORLD) since the financial crisis. With domestic stocks maintaining strong outperformance, investors question whether this trend will sustain as the U.S. relative share of global economic output continues to shrink against economies such as China, Emerging Markets, among others.
SPX retain a very long-term uptrend channel against the MSWORLD since the end of the financial crisis. The relative trend or ratio has recently exceeded its Sep/Oct highs of 1.8607-1.8688, with a surge to 1.9079 on 7/20/21. Although the relative strength trend has slipped to 1.891, the ability to maintain above the 2020 highs hints of a technical breakout and reaffirm the past year's trading range is a consolidation and not a top.
Despite the bullish price actions, some of the technical indicators suggest a brief pullback can also occur. Two key momentum indicators, MACD and PPO, are challenging their Mar/Apr 2020 highs. Failure of the two indicators to convincingly clear resistances can lead to near-term consolidations. A third indicator, RSI, is also showing signs of an overbought condition developing as the indicator struggled to clear the mid-to-high 70s. The above indicators, with near-term negative divergences, continue to retain intermediate-to-long term bull trends.
If the U.S. stocks (SPX) breakout is confirmed, then it would reaffirm U.S. stock outperformance against foreign peers will continue, at least from a relative performance basis. However, foreign stocks do not necessarily have to lose on an absolute basis, provided foreign stocks continue with their long-term bullish secular uptrends. Nonetheless, from a relative trading perspective, there are always winners and losers.
SPX's relative outperformance is also visible against China (Shanghai Composite), Japan (Nikkei 225), Europe (MSCI EAFE Index), and Emerging Markets (MSCI EM Index). The relative strength studies show China and Emerging Markets are the most vulnerable to SPX, as evidenced by the secular channel breakouts. The relative strength of SPX versus Japan is also nearing a critical juncture as a breakout above the top of its long-term term uptrend channel confirms the next SPX outperformance cycle.