Equities Outside The U.S. Are Sending A Message

For those of us who follow global asset classes, it has been evident for quarters on end that the majority of the world's stock markets peaked in 2011. And what is even more interesting, unlike the United States stock market recovery to new highs, the rest of the world has not been that fortunate. It is worth noting that cumulatively, equity markets outside of the US have not yet bettered their May 2011 peak.

Chart 1: Stocks of commodity producing nations continue to struggle

Equity indices within the commodity producing countries have been one of the worst performers since the early parts of 2011. If we look at the chart above, we can see that equities in Canada have grossly under performed their next door neighbours in the US. Moreover, the stock markets of Russia and Brazil remain extremely close to their 52 week lows. And while one could make a case that Australian equities have fared somewhat better, the All Ordinaries Index has yet again failed to breach its physcological 5,000 point resistance zone, losing almost 10% in three weeks - quite a worrying signal.

Chart 2: Chinese economy keeps slowing as predicted by equities

There are numerous reasons why the equity markets of these nations are under performing and to be quite frank, for investors and traders alike, the "why" shouldn't even matter. Having said that, I am sure the majority of the issues are linked to the Chinese slowdown and the lack of demand for raw materials. In issue 6 of the Short Side of Long newsletter I stated that there is a:

"...high correlation between the Shanghai Composite and Chinese Industrial Production. China bulls (if there are any left) would want to see the current basing pattern in the Shanghai Composite index breakout above the 2,500 resistance level. That would most likely signal a recovery in economic activity. While Chinese urban property remains overvalued, financed by a credit bubble, I would like to remind readers that the local equity market has already discounted the majority of the bad news. Unlike the Dow’s record breaking run, the Shanghai Composite is currently down over 60% from its all time highs and 33% from its 2009 highs."

Chart 3: Kopsi could break down, signaling deflationary pressures

So far, Chinese equities have refused to break out in a bullish manner, despite being so out of favour and oversold. This is sending a clear message that the economy still continues to deteriorate. Moreover, the Korean KOSPI and the South Korean export powerhouse economy seems somewhat on a similar path. I always like to refer to Kospi as I believe it to be a barometer of global growth. A great analyst by the name of Chris Puplava once stated that:

"...Kospi is quite significant in terms of gauging global growth given South Korea is such a cyclical economy, where more than 50% of their GDP comes from exports. Perhaps even more important, China, the juggernaut of global growth of the last decade, makes up more than 25% of South Korean exports and so watching what the South Korean Equity markets are doing is a good read on overall global health and Chinese growth."

Personally Kospi to me looks weak, especially when I consider Chart 3 on its technical merits alone. While both the S&P 500 and the Kospi peaked May 2011, one went to make an all time new high while the other remains on struggle street. Recent price action looks rather bearish.

A potential breakdown could send a very clear message that all is not well with the Chinese economy, a similar picture painted by the Shanghai Composite already discussed. Therefore, I urge investors to keep a close eye on the Korean Kospi as an early warning that global growth is once again decelerating. Obviously, the wisest thing to do as a trader who is willing to bet long or short on this opportunity, is to wait for the price to resolve itself in a bullish or bearish manner.

What I Am Watching