A Current Look at Relative Momentum Across Equities

Coming to the close of 2018, we're seeing an incredibly divergent year in equities markets across the world.

This stands out when we think back to just a year ago where every market across the world seemed to be going straight up. Beyond broad equities and the scope of this post, we had crypto going nuts, pot stocks exploding higher, tech companies across the world soaring, and private equity was simply insane.

Just eleven months later, hardly anything is left standing. Equity markets, the highly liquid indicators of investor optimism on the economy, have shrunk quite shockingly across the globe. Only the U.S. market is hobbling along, but it's also looking shakier by the day.

I'm not ready to declare we're officially in a global bear market yet but, given that the MSCI ACWI Index (in USD) has declined more than 15 percent from the peak, we're sure getting close.

US Stocks vs. European Stocks

Source: TheRichMoose.com, MSCI Inc.

If we look at the above chart, we can see the very clear divergence of these markets which started in May 2018.

While both the U.S. and Europe had a sharp pullback in late January and February, the U.S. recovered into September while Europe kept on sinking.

At this point, when priced in U.S. dollars, European stocks are down nearly 15 percent for the year and nearly 20 percent from the January peak.

U.S. Stocks vs. Japanese Stocks

Source: TheRichMoose.com, MSCI Inc.

Japanese equities were outperforming U.S. stocks in the beginning of this year. In fact, Japan had a great year in 2017.

But, like the other major developing markets, Japan couldn't work past the January 2018 high point despite being positive for much of the year.

Finally, in May, Japanese stocks diverged and are now down more than 5 percent on the year. They are also down over 15 percent from the peak in January.

U.S. Stocks vs. China

Source: TheRichMoose.com, MSCI Inc.

We see a similar pattern in Chinese stocks. Again, the year-to-date chart shows a big divergence beginning in May 2018.

The Chinese market was actually booming earlier this year and showed strong relative momentum compared to U.S. stocks.

Like European stocks, Chinese stocks never recovered after the January peak. They are down over 20 percent this year and have a peak decline in excess of 35 percent within 2018 alone!

Market Cycle Performance

If you look across this entire market cycle, it is clear: U.S. stocks, particularly technology stocks and small cap stocks, have been the major winners.

Investors in foreign markets have gone almost nowhere since the beginning of 2008.

Source: TheRichMoose.com, MSCI Inc.

While it is looking like the global equity bull market is ending for the 2009 to 2018 up-cycle, most investors haven't been richly rewarded. Especially if they bought heavily near the end of the previous up-cycle cycle in 2007-2008.

Nearly every major equity market has experience a ten year gross cumulative return of less than 20 percent! Japan looks comparatively good at around 30 percent.

During this same time frame though, an investor in the U.S. equity market would have more than doubled their money.

This level of global divergence is incredible. We have yet to see how the down-cycle ends up, but given the strong declines across many foreign markets, we could have some great entry points in the future.

The last time we saw a level of divergence even close to this in a equity market up-cycle was in the 1990s. We know the next up-cycle starting in the early 2000s proved to be fantastic for the investors who chose the markets that were under-performers in the 1990s.

I think it would be very smart for investors to look for good entry points in many commodity producing markets, several of the more depressed European markets, and in China and India.

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Markets I Trade: December 11, 2018

In my non-registered investment account I am developing my trend following strategy continuously. I don't pretend to have all the answers; I am always exploring and learning and I am sharing that journey with you on this blog.

All I know for sure is that I want every trade to end in three ways: a small loss, a small gain, or a large gain. I predetermine my risk on each trade and aim to make sure that risk is never exceeded.

Due to account size, my brokerage, my location, and my experience, I am somewhat limited in what I can effectively trade at this time given my risk tolerance. I recently have done a lot of self education on options and have begun to use LEAPS options in my strategy.

I try to limit my investing process to the most liquid markets that have the highest potential for bigger price movements. This generally means ETFs, certain leveraged ETFs, the USD/CAD currency pair, and certain emerging market currencies against the Canadian dollar or U.S. dollar.

Thankfully this covers a large portion of the investable market. ETFs track many different markets and also can provide exposure to currency movements (unhedged country ETFs).

With long call options and long put options, I can very effectively access markets with a relatively high degree of leverage and great risk management. I use only LEAPS options—options that expire more than one year from the entry point.

To monitor each instrument I trade, I look at moving averages and volatility measurements. Although there is no holy grail indicator, looking at these tools can help paint a pretty solid picture of where the markets are going.

Moving averages help identify the direction of trends and can help show turning points in direction. Using volatility measures makes it easy to size each position based on pre-determined exit points. High volatility markets translate to smaller positions while low volatility markets allow for larger positions.

In a currency pair trade, I have found that moving average indicators can be quite effective as well. However, in using moving averages alone, the trader doesn't have the same embedded exit points to help determine position sizing.

This makes moving averages most effective for trading my two primary account currencies—the USD/CAD pair. I don't try position size the USD/CAD pair as I am equally happy with my account cash being 100 percent in the Canadian dollar or 100 percent in the U.S. dollar.

I also look at breakouts, although I am not using them to enter or exit positions. Breakouts can be very helpful in confirming trends and seeing points of previous resistance.

Brazil (EWZ)

Given the current market environment, I am holding very few positions at this time.

In today's post I will provide an update on my Brazil trade.

Back in early October, I took an upside position in Brazilian stocks. I talked about that position entry several weeks ago in the November 13 post.

Since my entry point, my Brazilian stock trade has done very well. It has jumped about 15 percent and, barring a massive gap over my stop-loss, this will be a profitable trade that exceeds my initial risk.

EWZ (Weekly Bar)

Source: Yahoo Finance

Since June 2018, where EWZ was technically oversold, and September 2018 where EWZ was in an interim bottom, we saw a quick jump up. However, EWZ seems to have stalled out at the moment and I am looking for new medium-term highs to be made.

That said, I still think EWZ has a decent technical picture. A move over $42 would solidify the upside and could be a decent entry point.

Upside Optimism

  • An interim higher high was made when EWZ jumped over $37.65 in early October.
  • At current levels, EWZ is not technically overbought and is sitting roughly in the middle of the optimism range.
  • Since early October, the price is holding on top of the 40-week SMA.
  • Volume seems to be generally higher on upwards moves, indicating desire to buy and hesitation to sell.

Upside Caution

  • The price has fallen slightly through the shorter term indication—the 10-week SMA.
  • Although it is flattening, the 40-week SMA is still declining at the moment.
  • The price is now effectively in a trading range of $37 to $42 over the past two months.

If EWZ continues to bounce up from its current price of $38.70, the $47 level will be a key point to look at. That is when the prior strong upwards move stalled in January 2018. If EWZ moves past that, it would signal strength in the upside.

Right now, EWZ would have to jump more than 20 percent to hit $47.

EWZ (Daily Bar)

Source: Yahoo Finance

Looking at the daily chart, we can clearly see the trading range that has formed over the past two months. Although it would clearly be nice to see repeated higher highs, even in the daily chart, the $37.50 level has held twice now.

This chart shows an update on my current stop level. My exit on this trade has moved up and is a little over $37. The stop has really tightened up to the price over the past few weeks and is now within 5 percent of the price.

I entered this trade using a liquid 3x leveraged ETF, trading as BRZU. If I had to do this trade again, I would consider using EWZ long-dated options as they are highly liquid and a more efficient use of capital.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.