Markets Care About Money Printing
While the Federal Reserve has ended its quantitative easing (QE) program,
central banks in Europe and Asia continue to implement ultra-easy monetary
policies, which provide a tailwind for foreign stock markets. China announced
additional economic stimulus last Sunday and more may be on the way. From The
Wall Street Journal:
China's central bank has long been critical of the bond-buying programs
adopted by its counterparts in developed countries. Now, it's pondering
its own version of such easing and a close look at its balance sheet shows
it has room to do just that. Under deliberations at the People's Bank of
China is a proposal that could allow commercial banks to swap local-government
bailout funds for cash as a way to bolster liquidity and boost lending,
according to people familiar with the talks.
Have Markets Responded?
For a weak market to become a strong market a transition must take place from
a downtrend to an uptrend. The three steps needed for a trend reversal are
outlined in Trends:
As Easy As 1-2-3. Germany (EWG) completed step 3 earlier in 2015 by making
a higher high.
A similar and important higher high was made by the EAFE Index (EFA) last
month.
Land Of The Rising Sun
Japan (EWJ) recently broke out from a two-year consolidation pattern and simultaneously
completed step 3, telling us the probability of good things happening on a
sustainable basis are higher today than they were just a few weeks ago.
New Trend Emerging in Emerging Markets?
Emerging markets (EEM) have been laggards for years. Recent developments say
the odds of flipping to the outperforming category have improved.
Breakout After Seven Months Of Consolidation
The all-Asia ex-Japan ETF (AAXJ) recently broke out in a bullish manner from
a seven month base (period of indecision and consolidation).
Big Pops Speak To Changing Perceptions
Hong Kong failed to clear resistance twice in 2014 (see red arrows below).
While some "give back" may be in order in the short-run, the recent breakout
is positive from an intermediate-term perspective.
Six-Year Breakout
The Vanguard Pacific Viper (VPL) recently cleared resistance dating back over
six years. The longer VPL can remain above the blue line, the better for the
bulls.
Investment Implications - The Weight Of The Evidence
All investment decisions involve opportunity costs. We occasionally make a "chess
move A" in order to redeploy capital into a better risk-reward opportunity
via a "chess move B". For example, we recently took profits in homebuilders
and redeployed the cash into emerging markets (VWO). The chart below shows
XHB outperforming VWO from October 2014 until late March 2015. Recently, the
odds have shifted in favor of VWO relative to XHB. The charts speak to probabilities
and they can assist us in the area of risk relative to reward.
Opportunity Costs
We established some small positions in foreign markets on February 20 and
noted the observable improvements that were taking place overseas in a February
27 video clip. The chart
below shows the S&P 500 (SPY) relative to a global stock ETF (ACWI) as
of April 21. Recent developments tells us the odds have been improving for
foreign stocks relative to U.S. stocks. Since all breakouts, especially those
that have a vertical look, are subject to retests, "give backs", or failures,
we prefer to take a diversified approach rather than betting on a single market,
such as China.
