From the desk of Steve Strazza @Sstrazza
Responses to this week’s Mystery Chart were mixed. Some were betting on a breakout and buying while others wanted to fade this against the prior highs.
Others were waiting for more information, which is likely what we’d be doing. Thanks to everyone for participating.
But this chart is already packed with information. Let’s dive in and talk about what it is.
Here’s the Taiwan Stock Exchange Weighted Index zoomed all the way out to 1990.
Click on chart to enlarge view.
One of the participants suggested the chart could be a “giant 20 year base,” and was partially right. Even better, it’s a 30-year base.
12,000 – 12,500 is the level in the sand. If Taiwan is back above those former highs, we can’t be bearish.
But this week’s chart is not important for the reason that we want to be buying or selling it right now. Instead, it’s the possible impact that Taiwan breaking out of a three-decade base could have on Global equities and intermarket relationships. This is especially significant when viewed in the context of what we’re seeing from other international indexes.
What do I mean by this?
First, seeing Taiwan break out of a giant base is supportive of the strength we’ve been seeing from Semiconductors and US Tech more broadly. In an environment where semis are performing as well as they are now, we’d expect Taiwan to be making new highs. So this breakout would give us some serious confirmation.
Here are semiconductors breaking out of a massive base of their own relative to the S&P 500. Taiwan rallying after resolving higher while semis are trending back towards their old relative highs makes a lot of sense to us.
The relationship between Semiconductors and Taiwan is nothing new. Their outperformance in recent years has solidified them as one of the world’s strongest stock markets, and has been consistent with what we’ve seen from semis. But what about the rest of Asia?
Well, China just rallied almost 15% in two weeks after breaking above its multi-year downtrend line. Here is the Shanghai Composite.
Finally seeing some participation, and even relative strength from this major world index isn’t something to ignore. Taiwan and Chinese stocks combine to make up over 50% of holdings in the Emerging Markets Index $EEM. How do you think EM is doing if both these countries resolve higher from these bases?
While this is happening, the Emerging Markets/S&P 500 ratio is currently at a logical level of support at all-time lows, with a potential bullish momentum divergence.
These base breakouts would be major tailwinds for the EM space and could definitely spark a sustained reversal in this long-term structural downtrend relative to the US. We’ll be watching this closely in the coming weeks to months. It’s important to note that the primary trend is still aggressively lower and has been for a long time, so this type of reversal isn’t going to happen overnight.
Now how about the rest of Asia? Here is Japan’s Nikkei 225.
Japan has gone nowhere for three decades now. The way I learned it is there’s no such thing as a triple top. With price back above former highs near 21,000, they look poised to give another go at their recent highs near 24,000.
This would be the fourth time buyers test this level in several years, absorbing more and more of the overhead supply each time. How many sellers could be left? We think it’s only a matter of time before the Nikkei breaks out and sparks the start of a new secular bull market in Japanese equities.
This would be an incredibly bullish development for Global Equities as a whole considering Japan’s large weighting in diversified world indexes as well as their importance to the global economy. We’d expect this trend to last for multiple years and have plenty of legs, eventually heading back to former all-time highs.
Similar to China and Taiwan’s impact on Emerging Markets, this has implications for global equities. China and Japan represent the world’s two largest economies outside of the US and are the heaviest weightings in the All Country World Ex-US Index, together comprising 30%.
This chart shows the decade-long outperformance by the S&P 500 relative to the World Ex-US ETF $VEU. Hard to find a steadier structural uptrend. With that said, momentum is at its lowest level in a year and a half with a bearish divergence that could confirm any day now on a move below former highs at 6.32.
When you piece this puzzle together, it doesn’t seem like any coincidence all of these things are occurring at the same time.
The bottom line is that this rotation into Asian equities has planted the seeds for a reversal in the long-term trend of US outperformance. These kinds of secular trends don’t just transition from bearish to bullish. Bottoming is a process, not an event, so there will be plenty of time to take advantage of these potential reversals if/when we see more evidence to confirm this view.
Thanks for reading and please let us know if you have any questions!