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Can the Global Divergence Last?

April 18, 2012
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Over the past two weeks, the S&P 500 Index has broken below its short-term, 50-day moving average on two separate occasions. The big rally on Tuesday lifted the index back above the 50-day moving average, yet there is no denying that sellers have demonstrated a willingness to come back into this market. The chart below of the S&P 500 Index clearly shows the selling that has taken place thus far in April. 


 
Despite the April sell-off, stocks in the United States have done very well when compared to most international equity markets. Since March, we’ve seen a distinct divergence in the market between domestic equities and equities in countries such as Japan, China, Australia and Brazil. Moreover, stocks in Europe have really come under pressure of late, as fears over regional debt problems still are plaguing Old World markets.
 
The chart below of the iShares MSCI EAFE Index Fund (EFA), generally regarded as a barometer of international equity performance, shows the downtrend that’s occurred since mid-March.
 
  
Because we are in a global economy, what’s happened of late is that stocks around the world have generally moved in lockstep. If stocks are higher abroad, then stocks in the United States have been higher, too. However, the latest bout of divergence between domestic and international equities is something to take note of here, especially after the big first quarter surge in U.S. markets.
 
If global equities continue to struggle, then U.S. equities may follow. In fact, I’m expecting U.S. stocks to be much weaker in the months to come. Even if we see earnings come in healthy, it may not be enough to overcome the traditional “sell in May and go away” mantra that many traders practice.
 
I am watching domestic markets closely here, as I think another retest of that 50-day moving average will be hard to conquer. The next step below is at the 200-day moving average, which on the S&P 500 is about 115 points lower, or roughly 8% below where it currently trades.
 
If we do see the United States go the way of global markets, then we’d all be advised to look out below.