International Stocks Have Breakout Potential

David Dierking

With the S&P 500 back near all-time highs, international stocks, both emerging and developed, have drifted into the background. This despite an environment that actually sets them up pretty nicely for an extended rally.

Let's take a look at the economic backdrop.

  • Countries and regions all around the world, including China, Japan and Europe, have mostly put the COVID-19 outbreak behind them and are continuing to reopen their economies. The United States, on the other hand, is still dealing with near-record high daily new case counts and is facing additional restrictions in day-to-day activities.
  • The dollar has weakened significantly since March thanks to trillions of government stimulus and ballooning federal debt. This provides a bullish backdrop for foreign equity prices.
  • Foreign economies are expected to grow faster over the next few years and stocks are trading at significant discounts relative to the S&P 500.

Investors have used U.S. large-caps, especially mega-cap tech and internet names, but the rally can't reasonably be expected to last forever. International stocks have lagged for the past decade, but I think the time for an extended stretch of international outperformance could be near.

The recent outperformance for international equities coming out of the March low has fizzled out, but the chart for the iShares Core MSCI EAFE ETF (IEFA) looks promising.

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While not posting gains to the degree that the S&P 500 has, international developed markets stocks have been gaining steadily since the bear market low. IEFA is up more than 40% over the past 4-5 months.

But it's also struggled to break through the $60.50 level ever since it fell through it back in March.

If you combine those two trendlines, you have a textbook ascending triangle pattern that's about to come to a head over the next several trading days.

I view this as a bullish pattern looking for continuation above the $60.50 level.

From StockCharts:

The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that indicate accumulation.

There are a number of ETFs you can use to add international equity exposure to your portfolio. Along with IEFA, top options include:

  • Vanguard FTSE Developed Markets ETF (VEA)
  • Vanguard Total International Stock ETF (VXUS)
  • Schwab International Equity ETF (SCHF)
  • iShares Edge MSCI Minimum Volatility EAFE ETF (EFAV)
  • SPDR Portfolio World ex-U.S. ETF (SPDW)

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