Back in June of this year, when the Fed made clear its intentions to start a new QE program,
foreign stocks began to outperform the US market. US basic economic fundamentals and profits
performance has deteriorated over the second half of the year. Yet, by some measures such as
comparative PMI data, the US has continued to be one of the stronger economies. Moreover,
the QE 3 program is off to a very slow start. The ability of the Fed to buy up MBS at attractive
prices has proven a tougher than expected go, and mortgage lenders are not passing on the
lower rates in the secondary market to borrowers. Experienced observers wonder whether the
Fed may choose to modify the QE program. Even so, the US dollar has weakened since the
announcement of QE 3, putting US equities at a competitive diasadvantage that so far has
interested traders more than decent relative fundamentals. As well, buying foreign stocks
is a way to reduce short term risk exposure to the still unresolved fiscal cliff issue. Note,
however, that the relative strength line for foreign stocks is beginning to reveal that this trade
is getting crowded in the short run on extended RSI and MACD.
The chart linked to below shows the RS line for SPDR World - ex US (GWL) against the SPY
and also features the PS bearish dollar fund (UDN)which rises when the USD falls. GWL/SPY
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