Is A Shift Taking Place to Favor U.S. Equities over International?

Let me start by saying it’s amazing how much complacency there is in the market right now. I tweeted this morning a statistic from SentimenTrader about the large move that’s taken place in Rydex Funds… For every $1 put into the leverage bearish funds there’s been $8.2 put into the leverage bullish funds. Jason from SentimenTrader noted that this is the highest the ratio has been since 2001!

Okay back to the topic at hand. This morning I’ve been looking at the relationship between $EFA and $SPY (i.e. international and domestic equities). Even with the strength in the S&P 500 over the last few months, the market has still favored international stocks since July. Remember, this doesn’t international stocks have gone done, it just means the S&P 500 has gone up more than EAFE. However, it appears we are seeing some signs of this relative performance relationship shifting. While the ratio between $EFA and $SPY has been mostly flat with a slight tilt up since late-September, the Relative Strength Index (RSI) has been deteriorating.

The RSI has created some short-term support at the 50 level so I’ll be watching to see if this breaks for a sign of confirmation that traders are shifting their preference back to domestic equities from EAFE. We also have the 50% retracement level from the 2013 high to the July low that sits just under where the ratio is now. Since the up trend off the Sept and Oct. lows has already been broken, the 50% retracement needs to hold for international stocks to keep the spot light.

spy
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About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.