The Week Ahead: Best Global Investment Bets

The sharply higher opening last Wednesday spooked those who were short the market and encouraged the bulls to buy more especially in the market leading Nasdaq 100. The euphoria was short lived as the market dropped sharply Thursday and closed weak ahead of Friday’s job report.

The S&P 500 stock index futures were down about 4.0 points ahead of the jobs report which came in as expected. The selling picked up after the opening . As noted early in the week, the daily and weekly technical studies were still in the corrective mode suggesting that the market’s correction was not over. For full details see the Market Wrap section.

Though the data suggests that mutual funds are holding a small level of cash most data suggests that individuals are not heavily invested in the stock market. For those not invested should you be looking in the US or overseas?

The Markets

Fig1

As regular readers are aware the German Dax Index has been doing much better than the S&P 500 since the start of 2012. In early April 2015 the Dax had outperformed the S&P 500 by 40%. The gap narrowed to just over 20% in late June lows but there are now some signs that the Dax’s correction may be close to over. So where in the world should you be looking to invest now?

Fig2

The Vanguard MSCI Europe (VGK) has total assets of $15.6 billion, a yield of 3.17% and an expense ratio of 0.12%. It is up 8.36% YTD as it is down just over 4% from the mid-May high of $57.61.

There are 517 holdings in the portfolio with the largest in Nestle (2.6%), Novartis (2.4%) and Roche Holding (2.3%). There is 31.6% in United Kingdom companies with 67.8% in developed European stocks.

The weekly chart shows what appears to be a long term flag or continuation pattern, lines a and b. The ETF is now resting on the flat 20 week EMA and is trying to hold above the quarterly pivot at $55.09 with recent support at $54.14. The panic low in early July was $51.69 which is a key level to watch.

The weekly relative performance is trying to bottom out as it shows a pattern of higher lows with long term resistance at line c. The weekly on-balance volume (OBV) continues to lead prices higher as it shows a well established uptrend, line d, and made a new high just a week ago.

The Vanguard FTSE Pacific (VPL) has total assets of $3.06 billion, a yield of 2.47% and an expense ratio of 0.12%. It is up 6.83% YTD but down 3.69% in the past three months. There are 837 stocks in the portfolio with just 16.5% in the top ten holdings including Toyota Motor (3.17%), Samsung (2.2%) and Commonwealth Bank of Australia (1.19%). Just over 62% of the stocks are Japanese with 18% in Australasia, and 18.3% in developed Asia.

VPL made a new high in May at $65.05 and is now close to the quarterly pivot at $59.44. The weekly starc- band is at $57.31 with monthly pivot support at $57.09. There is chart support from 2013, line e, in the $56.40 area.

The relative performance broke its downtrend, line f, in March which is consistent with a long term bottom. The RS line has turned up but is still well below its WMA. The weekly OBV is below its WMA but still is above the longer term support at line g.

Fig3

The MSCI Vanguard Emerging Markets (VWO) has total assets of $43.8 billion, a yield of 2.81% and an expense ratio of 0.15%. It is down 5% YTD as it has lost 12.5% over the past three months. There are 996 stocks in the portfolio with 16.75% in the top ten holdings. There are 65.4% of the holdings in Asia with 18.4% in Europe

It has had a high for the year of $44.67 with weekly resistance, line a, now at $44.50. There is weekly support, line b, and the starc- band at $36.65. The monthly pivot support is at $35.14. the declining 20 day EMA is at $38.53 with stronger resistance in the $40 area.

The relative performance has been in a well established downtrend, line c, since 2013 and has dropped to further new lows over the past month. The OBV topped out in March and is now close to next long term support. The daily studies show no signs yet of a bottom.

The Vanguard Total World Stock (VT) has total assets of $4.65 billion with a yield of 2.32% and an expense ratio of 0.17%. There are 7210 holdings in the portfolio with just over 7% in the top ten holdings. There is 55% of the portfolio in the US, with 24.3% in Greater Europe and 19.2% in Asia.

VT dropped to a low of $59.86 in early July with the starc- band and chart support (line e) in the $59 area. The 20 week EMA is at $61.99 with the recent high at $62.81. The weekly RS line is still in a long term downtrend, line f, but is trying to turn up. The OBV is acting weaker as it is below its declining WMA and has made lower lows.

Once the correction is over I still like the US stocks the best but I am also looking for a pullback to stronger support in both the Vanguard MSCI Europe (VGK) and the Vanguard FTSE Pacific (VPL) as a buying opportunity as they look the best technically.

It is still likely to take some time before for the MSCI Vanguard Emerging Markets (VWO) can bottom out. The Vanguard Total World Stock (VT) is probably closer to a bottom but would look especially attractive in the $59-$60 area.

The individual investor turned a bit more bullish as of Thursday as the % of bulls rose from 21.1% to 24.3% while the bearish % dropped 9% to 31.7%. I would not be surprised to see the bullish % drop this week in reaction to some of the sharp declines of individual stocks.

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The 5 day MA of the % of S&P 500 stocks above their 50 day MA closed last Thursday at 46.3% and is likely to drop further after Friday’s close. It is still well above the oversold levels last seen in late June and early July when it was 2 standard deviations below the mean. Therefore it can go lower before it is back to extremely oversold levels.

Though Apple, Inc. (AAPL) did close above the lows there were quite a few widely stocks that were hit hard. Market leader Disney (DIS) was down 9.5% for the week while Tesla (TSLA) dropped 7.7% as both disappointed on earnings. Of course the biggest loser was Keurig Green Mountain (GMCR) as it was down 29%.

Commodities & Interest Rates

It was another rough week for crude oil as it dropped another $3.30 per barrel to close just above the March lows. Though the sentiment is extremely bearish there are no signs yet of a bottom as both the weekly and daily studies are confirming the new lows.

The Comex Gold futures were just a bit lower as it has formed dojis over the past two weeks. This market is also quite oversold and likely overdue for an oversold bounce. Any rally should have trouble taking the futures above $1115 or the SPDR Gold Trust above the $107-$107.50 level.

The yield on the 10 Year T-Note declined slightly last week but is still holding above the more important support. The jobs report came in as expected which in a survey Friday has just over 50% of economists looking for a rate hike in September. There are quite a few data points between now and then so in my mind the verdict is still out as the odds favor a December rate hike. The high yield bond market has continued to drop sharply.

The Economy

Last week the key PMI and ISM Manufacturing Index on Monday were in line with expectations while the Construction Spending was a bit lower. The Factory Orders and the PMI Services Index came in as was expected.

Fig5

In contrast the ISM Non-Manufacturing Index was strong at 60.3 which much better than the 56.3 that was expected. As the chart indicates this was the highest reading in the past three years. This is a very strong sign for the economy if these levels can hold over the next few months.

This week there is a light calendar with Productivity and Costs on Tuesday followed by Retail Sales, Business Inventories along with Import and Export prices on Thursday. On Friday we get the PPI, Industrial Production and the mid-month reading from the University of Michigan on Consumer Sentiment.

Market Wrap

Stocks were hit hard in early trading Friday but did manage to stabilize in afternoon trading as most of the major averages closed well above the day’s lows. The Dow Industrials lost 1.8% for the week as it was the seventh day in a row that the Dow declined. The Transports were not far behind as they lost 1.7% while the Utilities were one of the bright spots as they were up 1.1%.

The S&P 500 was down 1.25% which was a better than the 2.6% drop in the small cap Russell 2000. The NYSE Composite was down 1.1% and the negative weekly A/D ratio has kept the NYSE A/D line (not shown) in its downtrend and below its WMA.

Fig6

The Spyder Trust (SPY) dropped to test the daily starc- band and the quarterly pivot at $207.38 before closing well above the day’s lows. The late July low at $206.26 is still holding with the monthly pivot support at $205.36. There is important support in the $204.50-$205 area, line b. There is short term resistance at $209.72 and the declining 20 day EMA with further at $211.45.

The S&P 500 A/D line is slightly below its WMA but shows no increase in downside momentum. The A/D line has key resistance at line c which needs to be overcome to signal that the correction is over. The daily OBV has broken its uptrend (line d) and is now in a clear downtrend.

Fig7

The PowerShares QQQ Trust (QQQ) lost 1.47% for the week as the biotech stocks were hit with heavy selling. The iShares Nasdaq Biotechnology ETF (IBB) lost 3.6% for the week. The QQQ has next support in the $107.43 and the quarterly pivot. The weekly starc- band is at $104.18. There is resistance now in the $111-$113 area.

The Nasdaq 100 A/D line again tested the downtrend (line c) before turning lower. The A/D is still holding above the short term support at line d. A break of this level would be more negative. The OBV is closer to important support at line e, and is below its WMA.

The iShares Russell 2000 (IWM) closed below the July lows and the more important support, line f, in the $120-$121 area. The daily starc- band is at $118.29 with the weekly at $116.08. The sharply declining 20 day EMA is now at $112.66 with last week’s high at $123.53. The quarterly pivot is at $124.20.

The Russell 2000 A/D line dropped below support, line h, on July 23rd and closed the week just barely above the recent lows. The WMA is declining more sharply with key A/D line resistance at line g. The daily OBV is weak with next support at line i. The weekly OBV (not shown) is still holding above its WMA.

There have been no signs of panic liquidation yet as the ARMs Index hit 3.19 in early July. I would expect to see a day or two of heavier selling before the correction is over. Last week’s drop in the highly favored biotech stocks could precipitate more nervous selling. Therefore I would wait to be an aggressive buyer until there are clear signs of a market bottom.