International Markets See Strength as Dollar Declines

The title of this update mentions the international markets, but let’s actually begin with the U.S. markets. The S&P 500 has had a continued pattern of lower highs and lower lows. Two weeks ago, the S&P 500 challenged its 200-day moving average of price, which can act as a key point of resistance. It had previously failed to break above the moving average back in August. Two weeks ago, it failed once again.  

In the chart below, which shows the S&P 500, the blue line is the S&P 500’s 200-day moving average of price. The downward sloping “trend” line marks price resistance and has been drawn from the market’s recent peaks. Each time that trend line is touched and bounces off, it makes the resistance more significant. You can see that the trend line and the 200-day moving average intersect one another. The S&P 500 touched these lines, prior to moving lower over the last two weeks.

On the positive side, when the market touched the moving average and trend line, it was 86% short-term overbought, meaning that the likelihood of a pullback was rising. Now that the market has pulled back, the index is 92% oversold, increasing the likelihood of a rally. That is not to say that the market will rally, but the likelihood is higher in the short-term.

International Markets

Up through mid-October, one of the strongest performing asset classes had been the U.S. Dollar. Typically, a rising U.S. Dollar results in weaker relative performance for international equities. For Americans, and funds denominated in U.S. Dollars, the performance of international securities is a function of both the percentage returns of those securities and the return of that country’s currency relative to the US Dollar. A strong U.S. Dollar reduces the returns of a foreign security, whereas a weak Dollar increases the returns of a foreign security.

Through most of 2022, the Dollar had experienced low volatility and rising value. In recent weeks, volatility has expanded, and the Dollar has declined in value relative to other currencies. The chart below shows the relative performance of the U.S. Dollar and several additional currencies across the globe. These are currency ETFs, which are denominated in U.S. Dollars. As a result, you can see that as the Dollar rises, the other currencies decline in value. Over the last few weeks, the dollar has declined, resulting in the other currencies rising.

Canterbury Investment Management. Charts created using Optuma Technical Analysis Software.

As a result of a weakening U.S. Dollar, some international indexes have seen relative strength over the U.S. markets recently. One benefactor of the falling Dollar has been the Euro Stoxx 50, an index made up of the 50 largest, most liquid eurozone stocks. We mentioned earlier in this update that the S&P 500 failed to sustain a break above its 200-day moving average.  From a technical perspective, the Euro Stoxx 50 (as shown in the chart below using ETF: FEZ), has broken its trend of lower highs and thrusted through its 200-day moving average.

Canterbury Investment Management. Chart created using Optuma Technical Analysis Software.

Bottom Line

December is typically one of the better performing months for stocks. That said, this December has gotten off to a rocky start. The week between Christmas and New Years is usually one of the better performing weeks in the month, but we are still two weeks out. 

While the S&P 500 has wavered over the last few weeks, a weakening U.S. Dollar has led to some strength in a few international indexes. Remember, markets are dynamic and everchanging. While these international indexes have been favorable recently, markets can always pivot. Right now, however, the Euro Stoxx 50 index is outperforming the U.S. markets and is currently showing some more favorable characteristics.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.