After years of lagging U.S. stocks, international markets are outperforming, which may be sign of an S&P breakout, writes, Bonnie Gortler.

The Dow Jones, S&P 500, and Nasdaq 100 indexes have attempted several times to make new highs in September and October. However, each attempt stalled, resulting in a short-term decline as the averages stayed within a range below their new all-time highs.  If October lows are not violated, I am looking for a breakout to occur in the U.S. major averages finishing the year with a strong fourth quarter, historically a favorable seasonal period.  A key will be the support of the international markets.

Global markets have been out of favor lagging the U.S. market for many years. However, there appears to be a shift underway as investor interest in foreign assets has increased. It is bullish that the International averages are outperforming the S&P 500 this month.  It’s possible for this to be the fuel that lifts the U.S. market to new highs and new upside objectives.  As of Oct. 23, the iShares MSCI Emerging Markets ETF (EEM) is up 3.7%, the iShares Europe ETF (IEV) is up 2.7%, and the SPDR S&P 500 ETF Trust (SPY) is up 0.8%. There is a lot of room to the upside as both EEM and IEV are more than 12% below their January 2018 highs.

What ETFs to watch?

EEM is widely held, very liquid, and one of the oldest products on the market giving exposure to stock markets of emerging economies (see chart).

emerging markets
Figure (top to bottom): iShares (EEM) weekly, 12-26-9 week MACD of EEM, iShares Europe (IEV), 12-26-9 week MACD of IEV

The EEM has broken its weekly downtrend (black line) that began from its peak on Jan. 22, 2018 (red circle/orange vertical line on top chart).  This breakout is bullish for the intermediate-term and is a buying opportunity. It’s also bullish that EEM broke its downtrend from May 2017 to October 2017 with a favorable momentum pattern.  Resistance is at $44.  Any short-term weakness will likely be contained and staying above support at $40.

Below EEM is the 12-26-9 week, MACD of EEM.  MACD is a measure of momentum. Last week a new buy signal was generated.  If EEM continues to rise, it will break the almost two-year downtrend (blue line), increasing the odds that downside momentum is complete. The next several weeks can make a difference if emerging markets can sustain a rally supporting the U.S. market.

Another international ETF that is showing a breakout to the upside is IEV. This ETF is focused on the economies of developed Europe, including 350 stocks in more than a dozen different economies.

The chart shows the IEV breaking its downtrend (pink line top chart) from Jan. 22, 2018 (vertical orange line), corresponding to the same time the EEM peaked.  This breakout is bullish for the intermediate-term and is also a buying opportunity. The IEV broke its downtrend on the daily chart on Oct. 11, a few days before EEM.   Resistance is just above at $45. Any short-term weakness is likely to be contained near $44. A close below $41 would negate my positive outlook on IEV.

The bottom section of the chart is the 12-26-9 week, MACD of IEV.  MACD gave a new buy and is very close to breaking its downtrend (purple line).  An upside penetration would imply downside momentum is complete.  Expect the downtrend to be broken, confirming the breakout in price over the next few weeks.  

Recommendation

For those of you who are overweight in U.S. equities, are heavily weighted in a sector or have extra cash, now would be a suitable time to add a 5% position in EEM and IEV.  Use $40 as a stop for EEM and $41.00 as a stop for IEV.

It’s a bullish sign that international markets are acting well in October, and intermediate-term momentum is improving. EEM and IEV have broken their price downtrends and have been gaining relative strength compared to the S&P 500.  The intermediate trend is favorable. This would imply additional gains in the coming weeks. Strength in EEM and IEV, is likely to support the U.S market to make new all-time highs sooner rather than later.
 
I would love to hear from you. Email at bgortler@signalert.com to share your thoughts or ask me any questions you might have. Sign up here for a free three-month subscription to Dr. Marvin Appel’s Systems and Forecasts newsletter, published every other week with hotline access to the most current commentary. No further obligation.