A Tale of Two Markets

Last week, we witnessed the U.S. equity markets make a solid push higher, and we now are trading well above the February lows. In fact, we now are trading right below the key, 50-day moving average (blue line) on the S&P 500 Index (see chart below). I suspect that this market, indeed, may blow past this short-term technical indicator and, if it does, it likely will signal at least the temporary retreat of those bears that came out so forcefully in January.

If we do break above the 50-day moving average, it will not mean you should add money to stocks immediately. In fact, I would love to see more selling back toward the longer-term, 200-day moving average (red line) before I commit any significant long-term investment capital to equities.

The current “trade location,” as I often call the entry point, is just not that favorable in U.S. stocks, especially considering the volatility we’ve seen during the past four-plus weeks. I think if you are waiting to get back into U.S. stocks here, you might want to just continue being patient and wait things out to see if we do, in fact, break well above the 50-day average. If we see some strong-conviction buying here, then it might signal the all-clear sign. But until we see that conviction, I recommend that you stay patient and wait for a better entry point.

So much for U.S. stocks, but what about the fortunes of one of the leading foreign markets in the world, China? As you likely know, that country’s equity markets have had a very rough go of it lately, as can be seen by the chart below of the iShares FTSE/Xinhua 25 (FXI).

This measure of the top 25 stocks listed on the Hong Kong exchange now trades below both its 50- and 200-day moving averages. And, while you could say that this is better trade location, i.e., a better entry point for capital vs. U.S. equities, I think you have to put the China pullback into its wider context.

That country has sold off lately on two big increases in bank reserve requirements during the last month or so, and fears of a bursting China bubble still haunt the equities market. While I do not yet know whether China is through turning down the spigot on its monetary stimulus, I do know that the worry over slower economic growth in that country, indeed, has contributed to the very sharp sell-off in its equity markets.

All year, I’ve been telling you to watch China, as it could be the proverbial canary in the coal mine that gives us the heads up on a wider global sell-off. So far in 2010, we have received strong signals that things are going to be tough for the bulls.

Will this China selling continue, and/or will the U.S. markets manage to come out of their funk before long? We’ll continue watching this tale of two markets for complete details — and for the green light to put money to work in both domestic and international equities.