The EFA Advantage?

January 10th, 2013

by Chris Kimble

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Several months ago the Power of the Pattern suggested to Premium Members that they should be looking to go long European Stocks or create a market neutral spread trade by longing EFA and shorting the S&P 500 index.

Why go long Europe when they were having such trouble? See below for why the Power of the Pattern was suggesting buying European stocks. The chart is a ratio, which reflects long periods of outperformance or under performance of the 500 index compared to iShares MSCI EAFE Index EFA. Since 2008, the S&P 500 had outperformed EFA for four years, reaching oversold extremes.

Even though the S&P 500 has done well over the past 6 months (gaining 10%) EFA has made TWICE AS MUCH.

If history is a decent guide, after SPY outperformed EFA for four years, the recent relative strength of EFA for just six months should have more to go!

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