International Small Caps have shown improvement, with emerging markets leading the way.
International small-cap equities have had notable technical improvement over the past few weeks, as shown through the SPDR S&P International Small Cap ETF GWX. This fund moved higher at the end of June after finding support at the $29 level from December and continued climbing to the $31.50 level on its default chart this week. This forms a triple top at resistance from April and June and tests the longer-term negative trend line that has been in place since May of last year. The fund carries a less-than-acceptable 2.69 fund score but does show a positive score direction. The technical picture would strengthen with a potential breakout at $32, which would also return the fund to a positive trend. Initial support can be seen at the $29 level from June and last December.
The above representative includes broad international equity representation but carries a significant weight toward developed markets. Japan, South Korea, Canada, Australia, and the UK represent about 72% of the fund’s entire allocation, and there are 25 total countries included in the holdings. Therefore, it may be prudent to examine the relationship between emerging and developed markets by focusing on the small-cap space. This can be accomplished through a relative-strength comparison of the iShares MSCI Emerging Markets Small Cap ETF EEMS and the iShares MSCI Developed Markets Small Cap ETF SCZ. We will look at this relationship on a 2.5% scale as this has produced consistent signal movement over the years; buy signals have generally been followed by consecutive buy signals and sell signals have generally been followed by consecutive sell signals. This chart has maintained an RS buy signal since December 2020 and gave a second consecutive buy signal last April before reaching an RS peak in September. Movement over the next few months saw the chart retract into a column of Os as we entered 2023, signifying near-term weakness from small caps in emerging markets when compared to their developed market counterparts. However, the past two weeks of action have seen that shift, as the chart reversed back up into a column of Xs following the market action on Monday, July 3.
There are multiple representatives in the emerging market space that have shown recent strength, and these generally follow the areas that have exhibited strength through the broader market representatives. The Brazil Small-Cap fund EWZS has gained over 27% so far this year, while the India Small-Cap fund SMIN has risen over 13%. Both areas could provide potential opportunities for investors looking to gain exposure to international equities in the second half of the year. Regardless, the small-cap improvement seen across the broader international equity space adds to the positive weight of the evidence for the asset class moving forward.
