A Halting Development In The Global Equity Rally?

Via Dana Lyons' Tumblr,

A key barometer of worldwide developed markets is bumping up against 9-year highs.

While the U.S. stock rally is getting a lot of (deserved) attention here in the States, a perhaps underrated theme of 2017 has been the impressive improvement on the part of international markets. I say perhaps underrated because we certainly have been trumpeting the exploits of markets around the globe this year. Much of the noise has been made in various emerging markets worldwide, as we have noted in a long series of positive posts. However, developed markets have also come on of late to join in the good times.

We’ve highlighted this emergence in posts on Germany, Japan and others recently. Efforts in those countries have contributed to the recent strong performance of a key barometer of developed stock markets around the globe. The MSCI-EAFE (EAFE) Index represents developed countries in Europe, Australasia and the Far East. After a rough 2016, the EAFE has been on a tear this year, tacking on nearly 19%. That’s good news and, perhaps, bad news for the index.

The good news is obviously that the index is in a strong, steady uptrend. The perhaps bad news is that the EAFE has been so strong of late that its rally has brought it to the area of its 2014 peak near the 2000 level. That area represents the high in the index for the past 9 years – and also an area of potential obstruction in the near-term.

So will this 2000 area put a halt to the rally? In our view, it would actually be a welcomed development. The EAFE is on a torrid, nearly unabated, rally over the past 11 months. It could use a digestion or consolidation period to rest and regather fuel for an attempted breakout above this area. Such a digestion would increase the odds of a sustainable breakout once it does occur. Should the EAFE plow right through this area without even a pause, it runs the risk of a “false breakout” that eventually fails.

The next obvious upside target above here would be the 2007 all-time high near 2400. Given the strength of the global equity rally, there is little reason to doubt that the index could attain that target in the intermediate to longer-term. A brief rest may do it some good before it embarks on that next journey, though.

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