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  1. Home
  2. / Markets
  3. / Emerging Markets

There's a Red Flag in Global Stocks

The focus is on the U.S. market's recovery, but it's a bad sign when the rest of the world lags.
By NICHOLAS VARDY
Mar 12, 2012 | 09:30 AM EDT

A lot of virtual ink has been spilled by us financial pundits on certain technical levels in the U.S. markets, such as the importance of Dow 13,000 and whether the S&P 500 can hold above 1370.

With the U.S. market now trading above both its October and April 2011 highs, most chart watchers will tell you that the U.S. market has broken out to the upside.

I admit I watch these charts for the same reason you do. But I also remind myself they are more arbitrary than I care to admit. Since I spend a good chunk of my time looking at what goes on in markets outside the U.S., I see reminders of this all the time.

So, let's take a look at the charts of developed stock markets outside the U.S.

The best measure of this is the MSCI EAFE index, which measures the stock market performance of developed markets outside of the U.S. and Canada,  specifically Europe, Australi and the Far East.

As I look at this chart, a couple of things jump out at me.

First, although the MSCI EAFE index has echoed the S&P 500's steady rise since the start of 2012, it has yet to trade above the levels it saw in October, 2011. And it is still roughly 15% below the levels where it traded last May.

Second, although the MSCI EAFE index is trading above its 200-day moving average, it actually dipped below that crucial technical level last week during Tuesday's sharp dip before recovering.

If the S&P 500 had done the same, it'd be a big topic of discussion. Yet because it happened in the rest of the world, the downside breach of the mother of all technical indicators was completely ignored.

Take a look at the MSCI Emerging Markets Index and you get a similar, if slightly more encouraging, story.

While emerging markets are now trading higher than they did in October -- and they stayed above their 200-day moving average last week -- they are still trading about 13% below the levels they saw last April.

Now with U.S. markets now outperforming, you may be relieved that you don't need to focus on far-off foreign stock markets.

After all, if you're making money at home why bother going abroad? And you may be correct, over the short term at least.

But this negative divergence between the U.S. markets and the rest of the world is a red flag for me.

After all, over the longer term foreign stock markets -- including emerging markets -- have far outperformed the U.S. markets for as long as I can remember. So, if they are lagging the current U.S. rally that's not good news.

The bottom line?

I'll breath a sigh a of relief  global markets and not just the U.S. S&P 500 recovers to levels they saw last spring.

Until then, I'm staying very cautious.

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TAGS: Investing | Global Equity | Emerging Markets | Markets

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