USA, Europe or China: who is leading the way?
Can US equity markets once again take the lead over Europe?
Recently, it almost seemed as if Europe was rushing away from the US in terms of momentum. If investors followed chart technical patterns of early trend recognition, the majority of European and US country indices could be traded trend-following as early as mid-October 2022. European equities showed significantly more drive upwards and allowed fewer days of losses than North American equities.
Since the beginning of February, however, the picture has changed as far as the pioneering role between the USA and Europe is concerned.
For this Monday, the market radar assigns the daily stamp “Buy or Top” for all major US stock indices (S&P 500, Nasdaq 100, Russell 2000). All US indices have recently formed higher highs or higher lows, so with what we see in the charts, we can only advise buying when weak.
The situation is now different for the Europe region. There we see in the majority of the charts again first lower highs and lower lows. So we are doing early trend detection for the short side. Both the Euro Stoxx 50 (EPZ) and most European country ETFs have since been downgraded to the daily stamp “Buy the Dip”. There are three positive outliers: Denmark (EDEN), Italy (EMI) and Greece (GREK). Norway (ENOR) can score points again with the daily stamp “buy or top” at least for this Monday because of the regained strength of investments in the oil and gas sector, which we saw in the past trading week.
Among the European countries downgraded to “buy the dip”, the three major European countries Germany (EEC), France (EWQ) and Spain (EWP) still show some relative strength – this means that the gap to the last intermediate lows on the bottom still seems quite marginal.
The probability of a somewhat prolonged consolidation in European equities has increased significantly compared to the end of January. However, this does not mean that speculating on new highs – still in February – would be without a chance.
If Europe can maintain the “leading mutton” function that this continent has exceptionally been allowed to assume since October 2022, then this would mean that US equity markets will follow the current development in Europe: namely, lower lows and lower highs shortly. This means that traders should factor in a longer consolidation or even correction in the S&P 500.
If, on the other hand, the US can restore the “normal state”, namely that Europe follows the USA on the stock market and not vice versa, then this would mean that Europe will now follow the USA on the way up.
What are we talking so much about the USA and Europe? Wouldn’t China be the candidate most likely to have the economic power to deprive the US of its pioneering role on the stock markets?
So let’s take a quick look at the Chinese stock market:
The ETF for large-caps from China (FXI) has been in a correction movement since February 1, forming a bullish flag in terms of charts.
Last Friday, the lower low of February 6 in the FXI was undercut at the end of the day. The lower low of February 6 was already the second lower low within this correction movement. Currently, the FXI ETF is trading just over $30. Actually, the correction movement should now end, so that after breaking out of the flag, enough drive can be developed to head for new highs in a timely manner. Should the correction extend further to USD 28, then new highs would be targeted in the medium term rather than in the short term.
So we can state that the FXI ETF – representing China Large Caps – has now arrived at a neuralgic point in the chart, similar to the S&P 500. The next few days could decide whether we see new highs quickly or have to go through a longer breather in advance.
What do we see under the radar of the major stock indices?
AI is not yet in the IPO hype
In any case, it should be mentioned here that the Renaissance IPO ETF (IPO), which I consider very important as a risk-on pacemaker, is currently showing weakness.
With 10% each, Airbnb (ABNB) and Snowflake (SNOW) are by far the highest weighted positions in the IPO ETF, which contains a total of 87 stocks (as of January 1, 2023).
The Renaissance IPO ETF only includes stocks listed on Wall Street whose IPO was no more than three years ago. Not every IPO in the ETF is taken into account. According to the fund company, market capitalization and liquidity in exchange trading are decisive criteria for whether a share is included in the ETF or not. Companies that went public via a shell company (SPAC: Special Purpose Acquisition Company) are not taken into account.
The stocks mentioned on the marketradar on Friday C3.ai (AI) – which went public via a regular IPO on December 8, 2020 – and BigBear.ai (BBAI) – which went public via a SPAC about two years ago – were not previously included in the ETF. C3.ai could have been included in the meantime – but would then fly out of the ETF at the end of 2023 because of the 3-year barrier clause.
On Friday, the IPO ETF fell below the higher low, which can be located in the chart for February 7. The ETF is labeled from “buy or top” directly to “under watch” by today’s market radar.
This could be a sign that the US is not yet strong enough to restore “normal.” The IPO ETF should now quickly rise above USD 29 (daily closing price on Friday: USD 27.98) so that this warning signal will not turn out to be a trigger for a prolonged price weakness in the S&P 500.