A point and figure tour around the world

Sometimes it’s useful to step back and look at the big picture by ignoring the daily or weekly squiggles of the market. One useful technique of filtering out market squiggles is the point and figure (P&F) chart, which StockCharts describes this way:

Point & Figure charts consist of columns of X’s and O’s that represent filtered price movements. X-Columns represent rising prices and O-Columns represent falling prices. Each price box represents a specific value that price must reach to warrant an X or an O. Time is not a factor in P&F charting; these charts evolve as prices move. No movement in price means no change in the P&F chart.

I will be conducting a P&F tour of markets around the world. P&F charts are especially useful to interpret big picture patterns. Measured price objectives can be useful as indications of possible direction, but they have to be taken with a grain of salt.

With that preface, here is the weekly point and figure chart of MSCI All-Country World Index (ACWI) in USD with a 1% box and 3-box reversal. The index is correcting in the context of a recovery from a bear market. The measured price objective of 108.98 is a useful indication of the upside potential of the move.

Let’s continue this P&F tour around the world.

Let’s start with the U.S., which presents a mixed picture. The S&P 500 chart shows a similar constructive pattern of a recovery from a bear as ACWI. The measured target of 6121 indicates considerable long-term upside potential.

On the other hand, the NASDAQ 100 tells the story of an extended advance. The measured objective of 13303 indicates a deeper correction. As technology stocks have been the global leaders in a pattern that has gone on for years, this argues for U.S. underperformance in the medium term.

The chart of Dow Jones Europe shows a market that’s consolidating sideways after a bull move. Based purely on P&F analysis, it’s an open question of whether the next move is up or down, but I have more to say on that issue later.

However, there are some broad differences. Germany is becoming the sick man of Europe. The DAX is showing a similar sideways consolidation pattern, but the measured objective suggests further downside.

By contrast, the Greek market has been on a tear, though P&F analysis indicates that it’s too extended and due for a move correction. (Yes, that Greece).

Moving to Asia, China’s Shanghai Composite is in a bear market.

Hong Kong’s Hang Seng Index looks similarly ugly.

On the other hand, the Japanese market has been on a tear. The Nikkei 300 staged an upside breakout and it’s undergoing a high-level consolidation with a bullish price objective.

While the Nikkei bull move looks impressive, Japanese stock market strength is masked by Yen weakness. Measured in USD terms, the move looks far less compelling.

For completeness, I analyzed the P&F chart of commodity prices and interest rates. The CRB Index is bottoming with a strong upside measured move objective.

However, the CRB Index is highly weighted in energy, and oil prices have been recovering. The upside measured objective of Brent crude is $99.50.

Equally weighted commodity prices, which reduce the strength of oil prices, is undergoing a sideways consolidation and exhibiting a bullish measured move objective.

When charting interest rates, the analyst shouldn’t use a percentage move as a box size, but a more traditional scaling approach. The P&F chart of the 10-year Treasury yield shows an upside breakout after a long downtrend. The measured upside objective is an astounding 10.7%. This is the part where P&F price objectives should be taken with a grain of salt. While investors can appreciate the upward pressure to bond yields, a 6.3% target sounds astounding.

Putting it all together, the positive bullish pattern of ACWI, combined with strength in commodity prices and bond yields, tells a story of a global cyclical recovery. 

However, there are limits to P&F charting as a technique. Recent twin bearish China Economist covers argue for a China turnaround in the near future based on a twin application of the contrarian magazine cover principle. It appears that the problems in the property sector are overshadowing strength in other parts of the economy. The August China’s official PMI showed improvements in sub-indexes for production and market demand. More importantly, new orders returning to growth. As well, CNBC reported that China Beige Book’s survey found consumer spending bounced back in August. The rebound was broad based and evident in all categories, namely apparel, automotive, food, furniture and appliances, and luxury.

Should the Chinese economy get a second wind, investors can participate with exposure to Asian equities, or even European equities. Historically, the relative performance of MSCI China has been negatively correlated to the relative performance of the S&P 500, but positively correlated in varying degrees to European stocks.

n conclusion, my P&F tour tells a story of a global cyclical recovery, which should be equity bullish. A contrarian analysis of China suggests that it is poised for a cyclical recovery. Investors can participate in the China rebound theme with exposure to Asian and European equity markets.