From the desk of Steve Strazza @sstrazza and Louis Sykes @haumicharts
Last week’s Mystery Chart was the Israeli Tel Aviv 125 Index zoomed all the way back to the start of this century.
You might be wondering why we’re discussing Israeli equities of all things…
The short answer: They’re making new all-time highs.
In this post, we explore the sector that is mainly responsible for these gains, dive into its strongest components, and outline some long ideas with risk/reward setups skewed in our favor.
Not only is this yet another group of stocks we can use to express our bullish thesis on risk assets — it is also excellent information. Once again, we’re seeing another development pointing to the increasing participation and improving breadth across international equity markets.
This move in Israeli equities also fits into a larger theme that is taking place beneath the surface for stocks all around the world. It’s difficult to overstate the significance of these moves.
In short, we believe this is one of the most important undercurrents at play right now due to its potential implications for stocks and other asset classes, yet it continues to go widely unnoticed by most investors and analysts.
JC hit on it in our Conference Call earlier this week, and we’ll discuss it in further detail in this post. Teaser alert: It has a little something to do with Technology exposure.
First, check out Israel’s stock market pressing back up against its record highs from last January.
The Israeli Tel Aviv 125 Index tracks the country’s main exchange and is priced in local currency.
Interestingly enough, the Israeli Shekel is also trading at new all-time highs against the US Dollar. This is a significant tailwind for foreign investors and has helped drive the recent rally in the iShares MSCI Israel ETF and others, which we discuss below.
As you can see, Israel’s stock market has been in a structural uptrend for over a decade now. This is illustrated by the series of higher highs and higher lows since the Financial Crisis.
Considering how many international markets have made zero progress over this same period (think Emerging Markets, Europe, etc.), Israel has been a secular leader among world equities.
If the Tel Aviv 125 is above those former highs in the 1,600-1,700 range, the bias is higher toward 2,300.
You may be thinking, “yes this is all well and good, but I can’t buy the Tel Aviv Index…”
Fortunately, there are a number of vehicles we can use to express our bullish view on Israeli stocks.
The most basic way to do it would be through an exchange-traded fund like the iShares MSCI Israel ETF $EIS.
As you can see, EIS just broke out of a massive base to new all-time highs.
The breakout level around 60 was tested on at least 4 separate occasions over the last 13 years, with sellers successfully defending it time and again until this past month. Now that buyers finally have control and pushed prices explosive move higher from this base after testing that $60 level four separate times over the last decade.
You can see why we love these big bases…
When buyers can finally exceed these significant historical levels, all that pent up demand can result in a swift move higher. That’s exactly what we just saw happen in the MSCI Israel ETF as it’s already tacked on an additional 10% since taking out its prior highs around this time last month.
Despite the textbook breakout, we’re a bit late to this party — so don’t want to buy EIS at current levels. Not only is price extended over the near-term, but the risk/reward just isn’t there.
The real takeaway about Israel at the index level is its heavy exposure to Technology. Similar to the S&P 500’s makeup, Tech is almost twice the size of their next largest sector weight as it represents nearly 40% of the index.
We know this same characteristic is true for US Equity markets and has acted as a tailwind for the major averages in recent years. Although with Large-Cap Tech making zero progress for almost 5 months now and leadership shifting down the market-cap scale in favor of more cyclical areas, we’re in a different environment now.
Let’s see what other international equity markets with significant exposures to Technology have done and see if they can give us any clues for Israel.
Here’s Taiwan $EWT, South Korea $EWY, and Israel $EIS, all showing great strength and breaking out of multi-decade bases. These charts all look the same and are all trading at fresh record highs because of their heavy tech exposure.
To make things even easier, ARK Invest has an ETF specifically for this theme: The ARK Israel Innovation ETF $IZRL.
If you’ve been reading our work, you should already know our thoughts on the ARK ETFs… When we see ARK focusing on a specific area or individual stock, we want to pay attention. They have as good a track record as anyone over the past several years.
The fact that they’ve designed IZRL for investors to take advantage of this very specific Israeli Tech theme is yet another piece of evidence suggesting it is an area we should look to for buying opportunities.
Just take a look at this relentless uptrend on both an absolute and relative basis.