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Int'l Macro Vision: Sector Synopsis

Knowing what to ignore is vital in this headline-saturated environment. As technicians, we would offer that during confusing periods the thing to ignore is the daily charts. The daily timeframe, while occasionally helpful, produces noise in abundance and, by its nature, offers a limited view of the larger trend. Weekly and monthly charts are the antidote. They provide context and smooth out the short-lived whipsaws--all necessary in our current market.

And in today's market, the weekly charts continue to tell the same narrative: the path of least resistance remains upward. Key tells include: (1) bearish charts at the country-level are nearly non-existent--even Portugal is bottoming; (2) cyclical sectors like Manufacturing still project attractive trends despite short-term weakness; and (3) a bottom-up survey of individual charts reinforces optimism. For this reason, as well as the themes highlighted in this month's Strategy, we remain bullish. So set your charts to the weekly timeframe. You're gonna like the way they look--we guarantee it.

Highlighted themes:

• U.S. vs. International: The U.S.'s leadership status is under duress. The U.S./Int'l ratio's uptrend is losing momentum--negative momentum divergences are visible--and less “exploited” chart patterns are more prevalent overseas. Shift new exposure to international markets.

• Emerging vs. Developed: If international markets are gaining ground, where should new exposure be directed--emerging or developed? Both are attractive from a price perspective. In the developed universe, Europe is a leader, and Japan, despite a short-term setback, is presenting a buying opportunity at the 200-day MA. But EM gets a bump up due to currency tailwinds. From the Brazilian real to Indian rupee--heck, even the Mexican peso--most emerging currencies are bullishly inflecting relative to the USD. Accordingly, EM gets the nod (barely) as the overweight.

• What about Japan? Japan has fallen to the basement of the 2017 leaderboard. Is this the start of a larger decline or a mere mid-cycle pullback? We favor the latter outlook. The TOPIX and Nikkei 225 are holding above their 200-day moving averages, presenting an attractive entry point. Given the stronger trends in EM and Europe, we view Japan as a market weight.

• Leading Sectors: Stick with cyclicals. Defensive sectors have gained ground in recent months, as markets consolidated, but long-term trends still favor cyclicals, especially Financials, Manufacturing, Materials, and Tech. Consumer Discretionary and Energy contain pockets of strength, but breadth is not as strong. Perhaps the reports of the reflation trade's death are greatly exaggerated.

Open the attachment to read our complete international equity strategy document, and for links to our individual sector comments and recommendations.

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