Watching the ball drop…
Eating sauerkraut for good luck…
And reading Wall Street predictions for the year ahead…
These are just a few traditions I have to celebrate the new year.
Yet there’s one prediction that seems to top the list about every year: international stocks will finally outperform domestic ones.
You see, the fundamental rationale is clear. According to JPMorgan Chase, the price-to-earnings (P/E) ratio for international stocks stands at just 12.0X.
That’s a 30% discount to U.S. valuations, which is among the largest discounts of the past two decades.
But for 15 years, those calls for international stocks to shine has been like trying to catch a falling knife. Over that span, the U.S. has collectively outperformed by over 200%.
So why should now be any different?
Well, we’re finally seeing concrete evidence that a shift in leadership is occurring. At the same time, a tactical trading pattern is breaking out.
Trend Development No. 1: Big Picture
Relying solely on the fundamentals is a recipe for disaster. Yes, international valuations are cheap relative to the U.S. But that was also the case the last couple of years.
The problem is that international price trends have yet to confirm the fundamental thesis – until now.
One way I monitor price trends is with relative strength, which is the ratio of two prices plotted through time.
Take a look at the chart below…
It shows an exchange-traded fund (ETF) of international stocks in the top panel (blue line), which is the iShares MSCI ACWI ex US (ACWX). The bottom panel shows the ratio of ACWX against the S&P 500 (orange line).
A falling line means the S&P 500 is outperforming international, and vice versa. The red dashed trendline shows the long-term trend of the S&P 500 outpacing ACWX… until recently.
You can see the arrow marking where ACWX’s performance is picking up compared to the S&P 500.
This chart goes back five years, illustrating the significance of ACWX’s recent turnaround in performance.
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Trend Development No. 2: Short-Term Bullish Setup
ACWX is also doing something the S&P 500 hasn’t been able to sustain since 2021: trade above the 200-day moving average (MA).
That’s the red line in the chart below, where ACWX chopped around that important level in December before moving higher. Take a look…
That period of consolidation last month also created a bullish chart pattern known as a bull pennant (grey dashed lines).
ACWX is recently breaking out from that pattern, where it’s common to see a price move of similar magnitude prior to the pattern. That would target around $52 on ACWX in this instance.
Starting the New Year off Right
I don’t have a crystal ball and can’t tell you if international stocks are about to enter a sustained period of outperformance.
But the evidence at least points to a bullish trend over the near term.
The combination of valuations, positive shift in relative performance, and short-term bullish chart setup is starting the new year off right for international stocks.
Best regards,
Clint Brewer
Analyst, Market Minute
Reader Mailbag
Last week, we asked Currency Trader members a few questions to see how they’re enjoying Imre’s recently launched service. Here are a few of their responses…
Imre, thank you. Your 6/7-win rate is fantastic. I’ve only done about half the trades. I’m up about 24% with about three to four trades. That’s a great start. Your selectivity feels like the key to this incredible service.
I messed up the entry order on the GBP/USD trade. I placed the order and the next day I was in and out with a small loss. However, when you sold half of the position, the chart looked good to enter, which I did.
First day looked like it might not work for me but this morning I had 79 pips and booked that profit since I had already started badly on that recommendation.
– Mitchell F.
I love your service! I joined in the beginning of December, so I only have one closed trade (AUD/USD) and one open trade (GBP/USD) with a 50% TP. Closed profit to date is $163 on a $10K account.
Your trade alerts are very clear and precise… and therefore very easy to understand and execute. Your trade analysis and market reports are also very informative and helpful. In particular, I appreciate your trading style where risk management is your No. 1 priority.
I had no hesitancy in subscribing to your service apart from being in a position to afford the initial outlay. Once I grow my account sufficiently, I will sign up for a lifetime membership. My plan for profits generated is to provide a level of income during my retirement (I have been retired for a couple of years now), especially during these times of market volatility and drawdowns.
Even though I live in Auckland, New Zealand, I’m still able to execute trade alerts without difficulty, and I’ve only had to get up in the middle of the night a couple of times!
Many thanks for a wonderful service. Your skill and efforts are much appreciated!
– Mark M.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].