Gavekal Capital: The Bounce Back Rally Hasn't Overcome The Negative Trend In Momentum Yet

Thursday, October 30, 2014

The Bounce Back Rally Hasn't Overcome The Negative Trend In Momentum Yet

Two of the blunt technical tools that we look at are the percent of stocks trading above its 200-day moving average and the percent of stocks with its 50-day moving average trading above its 200-day moving average. These two tools work well together by a) identifying the main momentum trend in the market b) identifying turning points in this trend. They accomplish this because the % of stocks with 50-day MA above 200-day MA reduces the noise which is helpful in identifying the trend and the % of stocks trading above its 200-day MA is a more volatile series and changes direction at turning points earlier than the first series.

With that in mind, we went through our charts to try and determine whether or not the slight correction the equity markets experienced earlier this month is over. Based on these two blunt measures, it doesn't seem to be over in the developed markets or emerging markets with a few possible exceptions.

Let's start with the two major indices and then drill our way down to interesting country indices. 48% of all MSCI World stocks have a 50-day MA trading above its 200-day MA (we will refer to this.series 50>200 MA for the rest of the post). Meanwhile, 43% of MSCI World stocks are trading above its 200-day MA after hitting a low of 22% on 10/16. So we are not quite at the point to say that the trend in momentum has turned back upwards.

For the emerging markets, 59% of stocks have 50>200 MA and 50% of stocks above its 200-day MA. This series hit a low of 34% also on 10/16.

The MSCI USA is close to crossing the 50>200 MA line. 65% of stocks have 50>200 MA and 62% of stocks are trading above its 200-day MA. We would expect a sustained period of a few weeks with the red line above the blue line in order to call for a trend change in momentum.

In Asia, MSCI Japan seems a ways away from changing trend while MSCI Hong Kong is approaching the breakeven level.

In Europe, the breakdown in momentum was far worse than the rest of the developed world. However, here we have our three exceptions we alluded to above. MSCI Germany, MSCI Sweden, and MSCI Switzerland all now have more stocks trading above its 200-day moving average than percent of stocks with 50>200 MA. All three of these indices have had this configuration for one week or less so we will have to let a little more time pass before we can begin to feel confident that momentum is turning positive. These three indices do have the advantage of being very oversold.

In the emerging world, only one country indice is has the configuration of the three European country indices we just laid out. That country is South Africa.

MSCI India remains the most overbought country indice in either MSCI World or MSCI EM according to these measures.

MSCI Brazil has been completely washed out and seems to have a long way to go before momentum is again positive there.

MSCI Russia is very oversold as well.

Finally, the last BRIC country, MSCI China has had a nice snap back as currently 56% of stocks are trading above its 200-day MA compared to just 37% a few weeks ago. However, the 50>200 MA line still stands above it at 59%.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
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