EFA Death Cross Caps Off Historically Bearish Month

June tends to be the worst month of the year for this international ETF

It's been rough sledding for overseas markets of late, thanks in no small part to a backdrop of steadily escalating rhetoric between the U.S. and its major trade partners. This global weakness is a trend that we've highlighted in this space recently (via the Chinese large-cap tracker ASHR), and it's one we've capitalized on via put options on the iShares MSCI Emerging Markets ETF (EEM).

This week, the international equity tracker on our radar is the iShares MSCI EAFE ETF (EFA), which has its heaviest geographic weightings in Japan, the U.K., France, and Germany.Among EFA's top holdings are consumer staples (Nestle), big banks (HSBC), energy stocks (BP and Royal Dutch Shell), and automakers (Toyota) -- providing a fairly wide swath of exposure to various sectors of the economy.

EFA peaked early this year, notching its high close of $75.25 back on Jan. 26 (just prior to the volatility "melt-up" that roiled markets). Following a rapid-fire series of bear gaps, the $72 level emerged as resistance in early February, and went on to cap EFA's rally attempts later that month and throughout May.

However, it was a fresh round of trade-war threats on June 19 that really hammered EFA lower. The fund gapped below its 320-day moving average at the open, and ultimately lost 2.8% that day. By last Monday, EFA was exploring fresh year-to-date lows -- and by Thursday, the exchange-traded fund's 50-day moving average crossed below its 200-day counterpart, forming the ominous-sounding "death cross" pattern that's widely viewed as confirmation that a downtrend is in place.

Since that June 19 bear gap, EFA has managed only one daily close above the $67.73 level, which corresponds with a 10% correction from the January closing high. Meanwhile, the death cross itself is currently hovering just north of the round $70 level, in the neighborhood of a 50% retracement of the fund's 2018 closing high and closing low. Note also that the $70 region roughly coincides with a double of EFA's financial crisis-era low monthly close of $34.68, set back in February 2009. As such, the round $70 price point could prove a formidable obstacle to overcome.

It's not unusual for EFA to struggle at this time of year, according to Schaeffer's Quantitative Analyst Chris Prybal -- who notes that, since inception, EFA has delivered its worst average monthly return of the year in June, when the fund tends to drop 1.9%. So, with July now upon us (and bringing with it an average historical return of +1.0% for EFA), is it safe to assume that the worst of the sell-off is over?

While the elevated uncertainty regarding international trade disputes lends a higher-than-normal degree of difficulty to this question, Schaeffer's Senior Quantitative Analyst Rocky White found that EFA's post-death cross returns are far from dire. One month after a death cross (of which there have been 10 since 2002), the fund is up 0.38%, on average -- arriving more or less in line with its "anytime" monthly return of 0.44%.

And in fact, three months after a death cross, EFA sports an average return of 3.14%, with 70% of returns positive. That comfortably outshines the comparable anytime three-month return of 1.36% and 62.4% positive.

Barring the possibility of any major trade-war escalations -- which, it should be made clear, cannot yet be ruled out -- it's a reasonable hypothesis to suggest that additional downside could be limited in the short term following EFA's already-substantial sell-off. But with a likely "brick wall" of resistance in place around $70, we'll continue to advise against betting bullishly on international markets for now.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, July 1.