It's no secret that the NZX50 was an extremely poor performer in 2021. SPY was up ~25%, whilst the NZX50 capital index was down ~3% (Dec 31st reference dates). Many did do well with smart stock/sector selection, however those invested more broadly significantly underperformed.
So how can this frustrating situation be avoided in the future and what can we do to help determine asset allocations across various markets? I'll compare the NZ50C (capital index) and SPY (SP500 - broadest US market) to show how technical analysis can give come clues. To keep it as simple as possible, I'm going to frame this from the perspective of longer term asset allocation, rather than shorter term trading. However zooming in to shorter timeframes can assist trading if you are actively moving money around week to week.
Pull up the three charts below and let's run through the year. The last chart is the critical piece of the puzzle, it's the price of SPY divided by the price of NZ50C. The numbers don't matter, but what it shows is the relative strength of the two indexes. If it's going up then it means SPY is stronger than NZ50C. Each chart is on the monthly timeframe (i.e. each candle is one month) to keep on theme of only looking at the long term trend).
SPY:
https://www.tradingview.com/x/2crSAzTa/
NZ50C:
https://www.tradingview.com/x/M1xEQuRa/
SPY/NZ50C:
https://www.tradingview.com/x/nbtYauNe/
February 2021
The big red flag that the NZX may underperform occurred in February. On the NZX chart, you can see that the low of each candle was higher than the previous one for 10 months in a row. This trend broke in Feb, indicating that the monthly top was in and we would very likely see the start of consolidation. Now for someone investing for the long term this alone is of zero concern as by far the most likely scenario is that we have healthy consolidation and set a monthly higher low.
[Sidenote: I highly recommend everyone study multi timeframe analysis and learn how markets move. The concepts are actually quite simple, but it can takes a very long time for things to 'click'. When it does click however things become so much clearer.]
I said 'this alone' wasn't a concern, however we can see that SPY did not break this trend. Moving to the comparison chart we can see that the strength of SPY compared to NZX had broken through a long term resistance line (i.e. the strongest it had ever been).
I treat comparison charts exactly the same as I would the chart of a stock.
On any timeframe, I want to invest in something breaking out to new highs and in a strong uptrend. This was the major signal that the NZX was not the place to be, which only strengthened over the coming months.
You want to invest in that which has relative strength, and avoid things showing relative weakness until that trend changes.
September 2021
In September the relative weakness of the NZX changed and became stronger than SPY (i.e. price going down on the comparison chart). SPY had monthly consolidation (monthly candle breaking below the previous one after many many months) whilst the NZX was largely flat.
Now I say you don't want to move into things until the relative weakness changes to relative strength, however it's not quite so simple. This example illustrates it perfectly. As said previously, I treat the relative strength chart just like the chart of a stock. So if I pulled that up in August, I would have said we are likely to see monthly consolidation
at some point (can't predict) to set a monthly higher low and then the uptrend will resume. I say that because:
- Each monthly candle low was higher than the previous for 7 months
- We are some distance above the EMA12 - I treat this as the 'revert to mean' point, so the higher we are above it the more likely we are to test it.
- Continuation is most likely as the prevailing trend is always most likely to continue. This is reinforced by the monthly consolidation holding the EMA12 (monthly bull flag)
What we saw was very healthy consolidation (this goes back to learning how markets move). The key thing is that the
trend needs to change. For the NZX to show relative strength to a point of having confidence in moving funds we would need to see a monthly downtrend. Now there are strategies for trading these trend changes to minimise risk and maximise reward, however I won't go into that detail here.
January 2022
Now the general theory is that when things drop, those with relative strength will drop less and those with relative weakness will drop more... but again it isn't quite so simple. At the end of December the relative strength chart was very far above the EMA12 line, so we can expect that at some point that we will 'revert to average'. Given this technical setup, we can conclude that there is a higher probability (but far from a certainty) that SPY will show greater weakness than the NZX on any pullback, which of course we saw. This relative strength/weakness is quite interesting to watch on the shorter timeframes.
Looking Forward
Probability is increasing that a longer term top has been set on the strength of SPY compared to the NZX. The trend gets a little messy on the monthly chart, but changing to a 2 monthly chart we have retraced around 65% from the previous 2M higher low. This increases the probability that the next bounce will result in a 2M lower high. Note that these comparison charts do not show whether prices are going up or down in general.
Hopefully this provides another perspective you can look at adding to your investment toolbelt. Maybe you can do a little homework and compare individual stocks vs an index, or if you really want to hate yourself look the the Nasdaq (NDQ) comparison chart with the NZX50c.
Using Technical Analysis to Avoid Investing in Poor Performing Markets - The NZX 2021
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Originally Posted by JohnnyTheHorse
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