From the desk of Steve Strazza @Sstrazza
Just as we focus on the strongest markets and stocks to find opportunities during equity bull markets, we look to identify the weakest areas during bear markets. We just want to be in the strongest trends, regardless of their direction.
A few weeks ago we ran some statistics to highlight US stocks that were bucking the trend during the selloff, as those would be the areas to focus on if/when equities eventually regained their footing. While many names have fared well, we were a bit early as the market soon broke below our risk management levels, putting us in a position where we no longer want to be long stocks.
As the selling has accelerated recently, we thought it prudent to do a deep dive into World Equity Markets to see where the strength and weakness is, as well as what these indexes are telling us about global breadth. Now that the structural picture has changed for equities it is time to start considering some of the weaker areas around the globe for potential opportunities on the short side.
The table below shows momentum, performance and new low information for Global Equity Indexes around the world. Let’s see what it’s telling us.
Click on table to enlarge view.
I encourage you to check it out and filter the data by the other columns as well. We’ve filtered the table based on the percentage change from the indexes lowest lows in 2018.
We’ll start with the strongest performers on a relative basis, which there have not been many.
Only 6 of our 45 indexes are still trading above their 2018 lows and on a weekly closing basis, that number goes down to just three. The only countries that are trading solidly above their key lows from 2018 are New Zealand (NZSX 50), China (Shanghai Composite) and Denmark (OMX Copenhagen).
Not a single index is trading above its 2018 highs, although New Zealand is very close as it is currently trying to find support at this key level.
Notice how prices have been grinding consistently higher in an orderly fashion for over a decade now. Not only is New Zealand leading based on returns from 2018’s highs and lows, but they are also currently sporting the highest daily RSI-14 reading on our list and are one of just three countries not currently in oversold territory, along with the US and China.
The bottom line is, if and when it comes time to buy stocks again, these are the kinds of charts we’ll be looking for.
Now for the bad news. Every single index is currently in a bearish momentum regime, which tells us this selloff has truly spared none. There may be signs of near-term exhaustion and a coming counter-trend rally as 42 of our 45 indexes are currently in oversold territory. But with many at extreme oversold levels, illustrated by an average and median RSI-14 reading below 20, it’s hard to imagine anything more than a dead cat bounce from most of these countries for now.
Based on the textbook -20% definition, every Global Index that we track is currently in bear market territory with the exception of China. This is obviously not a positive. What’s more, is the average drawdown from 52-week highs is 34% which tells us that most of these indexes are very much in the throes of a very severe selloff.
Even the United States, which we gauge using the Wilshire 5000 Total Market Index is lower by 31%. The S&P 500 has not fared much better, currently down about 29% (not shown in table).
Some of the most drastic examples are Argentina, Greece, Russia, and Austria which are all about 50% off their highs as of yesterday’s close. Another eight indexes are lower by at least 40%. This type of broad-based, extreme weakness may seem like it happened overnight but breadth in the US and abroad has actually been deteriorating for months now, and plenty of warning signs were present, many of which we outlined in posts over the past two months.
Last but not least, 40 indexes made new 52-week (or in most cases, multi-year) lows and 3 indexes made new all-time lows at some point in the last two weeks.
Long story short, the intermediate-term outlook for global equities is very grim right now as just about every index in the world has suffered structural damage. With that said, momentum and price have hit such extremes that we’d be betting on a counter-trend rally soon, but one that should be met with further weakness.
In the same way we used deteriorating breadth to help us get out of stocks in January, we’re waiting to see breadth improvements to show signs of a tradeable bottom before getting back in. Until then, we’re focused on building a list of leaders that we’d expect to outperform once the market regains its footing.
Thanks for reading and please let us know if you have any questions!