One of the major themes that kicked off 2015 was the shift from domestic equities to international. Many try to explain the shift as being caused by the large influence that foreign central bank had via easing coupled with the rise in the U.S. dollar. But we don’t know for sure – all we know is that it happened. By looking at relative performance charts we can see that International markets, as measured by the iShares MSCI EAFE Index Fund (EFA) began outperforming domestic stocks (i.e. the S&P 500).
However, that seems to be shifting once again as domestic markets have begun outpacing their international brethren. In the chart below, we can see the ratio between EFA and SPY (the SPDR S&P 500 ETF). When the black line is rising we know that EFA (international markets) is rising more (or falling less) than SPY which indicates outperformance. Over the last several days we’ve seen this ratio break its rising trend line and began making lower highs and lower lows.
Focusing on momentum, a bearish divergence began taking hold in the Relative Strength Index (RSI) in early May as the indicator made a lower high while the ratio between EFA and SPY headed higher. This ultimately led to the RSI breaking through prior support of 47 and the negative divergence acted ultimately as a warning that the trend in performance would rotate back to the S&P 500.
International Markets (EFA) to S&P 500 ETF (SPY) Ratio Chart
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