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Tuesday, July 21, 2015

South Korea Update: Look out Below

There is scope for further downside in South Korean equities. The long-term trend-line from 2012 lows in EWY was broken with a small downside gap around 55, which would imply a lower price projection around the 48 support zone.

The weekly EWY chart shows that bulls lost control near the 64 resistance area. The preceding bullish candle set-up discounted weakness on the macro level, which placed pressure on the Bank of Korea to ease policy measures. 

This thesis was short-lived, as expressed in my April 25 note on South Korea. The Chaikin Money Flow (a volume-related oscillator) turned positive around late May, which would have been a signal to buy EWY around 55 support and sell near 64 resistance.

Currently, the break lower in EWY appears oversold, as shown by the relative strength index (RSI). While this could signal near-term support around 48, a sustained counter-trend move is unlikely so long as decreasing momentum on the MACD remains. 

The Korean Won's recent decline against the Japanese Yen is also an important factor, which could strengthen support. However, a long-term downtrend remains for JPY/KRW, which keeps a bearish bias intact for EWY. 








Thursday, May 7, 2015

Searching for value abroad

The equity bull market is now the third longest in US history, and it is increasingly more expensive relative to international markets. At this stage, paying a higher price to participate in an extended rally is one reason to begin the search abroad for value opportunities.

The Cyclically Adjusted Price to Earnings Ratio (CAPE) for US stocks is around 27 compared to its historical average around 16. Meanwhile, CAPE is well below its historical average in many countries such as Greece, Austria, and Japan.

While valuation should not be used in isolation, it is important to note that  value opportunities appear more attractive as technical breakouts occur abroad. For example, it took about 20 years for Japan to work off extreme valuation from its bubble era in the late 1980s. The current pull-back in international markets should be assessed for opportunities to buy.

I compiled data featured on WSJ of selected markets that appear undervalued, overvalued, and near its historical average based on the CAPE measure.




Saturday, April 25, 2015

Pressure to ease as South Korean shares advance

Slower global growth and declining inflation adds pressure on the Bank of Korea to cut interest rates. If the Korean Won depreciates due to lower rates, a boost to exports could follow, which will add further support for Korean equities.

South Korea has joined the Asian stock market rally. The top chart shows a bullish advance in the South Korea iShares ETF (EWY). A pull-back is likely, which could offer opportunity to build positions.

The recent move is supported by improving momentum as the MACD turned positive. The most recent positive inflection occurred near the 2013 bottom in EWY. The MACD histogram (blue bars) is more sensitive to price changes within the longer trend, thereby providing an early signal of an advance at the start of 2015.

The last panel offers confirmation from the Chaikin Money Flow (CMF), a volume-related oscillator. The CMF is a measure of buying pressure compared to the total volume over the past 21 days. The CMF recently turned above zero, indicating the potential start of an upward trend. Further confirmation of sustained momentum is needed if a pull-back (with declining volume) around the 66.00 resistance level nears.


For a technical view of South Korea's KOSPI index, read Nicole Elliott's 4/23 column in the South China Morning Post. Nicole identifies a potential breakout from major long-term resistance going back to 2007.

South Korea (a "closet developed-market country"), is not unique in its latest breakout. China, Japan, and Europe are trending higher on policy support. As investors cover their shorts, expect increased flows outside of the US. This will likely precede a pick up in global growth.

This should be a positive for emerging markets - a group that has evolved to track ex-US/Canada country performance (EAFE index). However, despite the recent counter-trend breakout in the emerging market ETF (EEM) relative to the S&P 500, more confirmation is needed given increasing signs of a pull-back along the long-term downtrend.

Given further confirmation in the months ahead, positive signals from international equities could imply a breakdown in the US Dollar and an advance in commodities -- all of which provide support for inflation.