Well, we’re nearing the final stretch of 2017 and still not a major correction in sight. Compared to the last few years, this has been a welcome break for us, as I’m sure it has been for many investors as well. But when it starts to feel like “anyone can do this,” that is when the market can hit you the hardest. So, while we’re enjoying the ease, we are well aware of the eventuality of a more difficult market, or the possible effects of another recession. As a trader friend of mine says, “you can’t have booms without busts and you can’t have busts without booms.”
So, what we are currently watching for is a major shift in sentiment. Normally, we’d illustrate that with a NYSE Advance-Decline line chart. But we’ve done that plenty in the past, and you can see the latest data by using a link in one of our previous Market Commentary blog posts. This month, we think it might be more fun to look at the International Markets.
International – we still love Japan and continue to have an allocation to their market in our core equity (Advance-Protect) model. We also like China, though we don’t currently hold any China-focused funds. However, by our measure, the EFA (MSCI EAFE International Index2) has lost its strength against the SPY (S&P 500 Index1). See the chart below.
Three Year Chart of the SPY (SPDR S&P 500) vs EFA (iShares MSCI EAFE Index) with 5 and 55 Day Moving Averages (Stockcharts.com)
If you take a look at this chart, notice when the blue line crosses under the red line. That’s the point at which we began to pay attention to International investments and their relation to the Domestic S&P 500. This happened around April of 2017. However, if you look at the most recent cross over, in October, the blue line went back up over the red line. To us, that suggests the S&P 500 is returning to be the preferred asset category, ahead of International.
In other words, if you’re thinking of getting into International funds now, because they’ve been doing well recently – you may be late to the party. We often refer to metrics like this to help us be on the right side of a market trend. And as the old trading adage goes: “the trend is your friend.”
From your friends at Shadowridge, we hope you are having a happy and safe Thanksgiving holiday!
All the best,
1 The Standard and Poor’s 500 is an unmanaged, capitalization weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 The MSCI EAFE is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.