World stock markets can be broken up between the U.S. and the rest of the world. Right now, the U.S. is winning but will it last for long?
Since the start of 2014, the U.S. benchmark S&P 500 index is up 7 percent. Meanwhile, the MSCI EAFE index, which tracks the stocks of 21 developed countries outside the United States, is down 3 percent for the year.
In other words, if this were a battle between the American King Kong and the world’s Godzilla, the giant gorilla would be strutting around wearing some impressive lizard-skin boots right now.
Can the U.S. markets continue to wallop the rest of the world?
Gina Sanchez, founder of Chantico Global, believes that while U.S. data may be improving, it’s not enough to support the bullishness in its markets. Meanwhile, data from the rest of the world has not been doing well, she says. That may continue, even if U.S. growth is tepid.
“I think that the U.S. markets are a little bit vulnerable here,” said Sanchez, a CNBC contributor. “The question is can we keep the spigot on long enough in terms of liquidity so that real demand starts to take hold. We haven’t seen that yet. If we see that, then in fact we could be in the clear. And the EAFE really is going to be mired in stagnation, which is what’s happening in Europe.”
However, Sanchez sees one factor that may change the game for the U.S. vis-à-vis the rest of the world. “The dollar is strengthening dramatically,” she said. “That is going to help prices for all companies all around the world, not the U.S.”
While Sanchez says she is not a fan of Japanese equities, a stronger dollar could particularly favor European stocks provided, of course, they are able to overcome such obstacles as trade sanctions on Russia. “Europe has a lot of issues so I think there are a lot of reasons for this divergence,” she said. “But the strong dollar is going to hurt the U.S. stock market eventually.”
Richard Ross, global technical strategist at Auerbach Grayson, thinks the S&P 500’s long-term gains will continue, albeit with some corrections.
“The ease with which U.S. markets have been able to shrug off any sign of weakness—whether it’s price weakness or geopolitical uncertainty—is truly astounding,” said Ross, a “Talking Numbers” contributor. “That’s quite bullish.”
However, like Sanchez, Ross sees some vulnerability in the S&P 500 from a short-term technical perspective. Namely, he is concerned that a bearish head and shoulders top may have formed over the past several months with a neckline coming in around its 200-day moving average currently at 1,898.
But Ross thinks investors should be watching the S&P 500’s three-year chart. He sees the index now testing a multiyear trend line which began in 2011.
“A decisive break below that multiyear trend line could set the stage for a test of the 50-week moving average which also comes in around 1,882,” said Ross. “That’s prior resistance which should be support on any pullback. Let’s not say the sky is falling but clearly in both the short- and longer-term technicals, there’s room for a bigger pullback within the context of an otherwise strong long-term trend.”
In the past, Ross has called for a larger correction to the S&P 500 but that has yet to occur. Nonetheless, he sees the need for a single-digit percentage correction in the nearer term, a magnitude that was fairly frequent until just a couple of years ago.
“Once you take out that 200 day,” Ross added, “then we can talk about potentially a mid-teens [percentage] type correction which in all honesty would be quite healthy and one which this market sadly needs.”
To see the full discussion on the S&P 500, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.