Wednesday, September 19, 2012

To be in Europe this autumn...

Most of the buzz in the financial blogosphere has been focused on the actions of the Federal Reserve. As a result of Ben Bernanke's announcement of potentially unlimited expansion of the Fed's balance sheet, stock prices surged last week.

Let's step back for a moment and consider the following two relative return charts, which are relative to ACWI, the MSCI All-Country World Index ETF. I have deliberate removed the labels. Which would you rather own, this one?

Chart 1: Rally through a relative downtrend

Or this one?

Chart 2: Breakdown through a relative uptrend

I won't keep you in suspense. The first chart is the ratio of FEZ, the ETF representing the Euro STOXX 50, against ACWI and the second chart is the ratio of SPY, representing American equities, against ACWI. (All are US-listed ETFs denominated in USD, so there is no currency effects.)

Technically speaking, the rally in the past few weeks has been unusual. Despite all the hoopla about the actions of the Fed, it has been European equities that have begun to bottom and started to become the leadership. US equities have begun to weaken against global equities and started to lag. What's more unusual is emerging market equities, which has normally been thought of as a high-beta play, have not performed well.

American investors shouldn't be overly focused on just their own market and look for emerging leadership across the Atlantic. To be sure, there are sectors like the Homebuilders that remain leaders, as shown by the relative chart below. But this is a relatively small weight in the US market and this industry cannot be expected to carry the entire US market with it.

When I look at the heavyweight cyclically oriented sectors, such as Industrials (XLI) against ACWI, they appear to have broken down through a relative support level - which is not a sign of a healthy market.

The same goes for Consumer Discretionary stocks (XLY) against ACWI. XLY has formed a similar pattern as SPY of breaking down through a relative uptrend line.

Putting it all together, these charts suggest that global investors are far more worried about the fiscal cliff than any eurozone financial crisis. Given the giant party being thrown by the Fed and ECB, it seems that people are having a better time in Europe than America.

Full disclosure: Long FEZ, EWI.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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