HONG KONG HITS TWO YEAR HIGH -- RISING TIDE IN ASIA HELPS CHIPS -- GOLD JUMPS $7.00
HONG KONG MARKET HITS NEW TWO-YEAR HIGH... Over the first three quarters of this year, Asia has been the strongest region of the world. Within Asia, China has been the main powerhouse. One sign of that has been the relative strength in the Hong Kong market. Chart 1 shows the Hong Kong Hang Seng Index hitting a new 52-week high today. The relative strength line plotted along the bottom of the chart divides the Hang Seng by the S&P 500. The RS line bottomed in late April and has been rising ever since then. It also hit a new high today. That simply means that the Hong Kong market has been doing better than the U.S. market for the past six months. Five years ago, weak Asian markets pulled global markets lower. Now they're pulling them higher. We recently talked about the strong correlation between Asian markets and industrial metal prices. A lot of the new buying of aluminum, copper, and steel is coming from China. [China is also buying a lot of cattle, cotton, and soybeans which accounts for the multi-year highs in those commodities]. During the third quarter of 2003, the two strongest global stock market sectors were non-ferrous metals and semiconductors. Both of those rising trends are also linked to the rising tide in Asia. Chart 2 shows the Semiconductor (SOX) Index bottoming a couple of months ahead of Hong Kong. Since then, both have been global leaders.
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HANG SENG EXCEEDS 2002 PEAK... The Hang Seng Index rose 206 points today to close at 12250. That close exceeds the previous peak formed in the spring of 2002 and the fourth quarter of 2001. Charts 4 and 5 compare that Hang Seng strength with the Japan's Nikkei 225 Index and the S&P 500. Neither of the last two markets are close to hitting two-year highs. Japan has retraced 75% of its fall from the 2002 peak. The S&P 500 has regained only about two-thirds. While Japan has been doing better than the U.S., China is the strongest of the three.
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COMPARISON OF HONG KONG AND THE SOX... Since Asia produces so much of the world's semiconductors, trends in Asian markets are closely correlated with trends in the SOX Index. Charts 6 and 7 compare monthly bars for Hong Kong and the SOX since 1997. Notice the close correlation between the two markets. The 1997-1998 Asian decline produced a lower SOX Index. Both bottomed together near the end of 1998 and peaked together during 2000. The SOX bottomed before Hong Kong late last year. However, both are now rising together. The fact that chip stocks were the top-performing global sector during the third quarter of this year is largely tied to the relative strength in Asia.
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ASIAN INTERMARKET IMPLICATIONS... So much of the global intermarket trends are coming from Asia. Asian buying is boosting the prices of global commodities. New strength in the Japanese yen is weakening the dollar and boosting foreign currencies. Higher commodity prices, and the prospect of less Asian buying of U.S. Treasuries, are pulling long-term interest rates higher. That's bearish for bonds. In other words, strength in Asia is good for commodities, bad for bonds, and bad for the dollar. It's good for stocks, especially basic materials and semiconductors.
TI PULLS SOX UP TODAY... The Semiconductor Index is trading higher today and is close to reaching another 52-week high. The weekly bars show that the next potential resistance barrier is near 550. The next major resistance barrier isn't seen until the SOX reaches its early 2002 peak near 650. A lot of the chip buying today is tied to strength in Texas Instruments. The chip leader jumped to a new 52-week high today on very strong volume. Its weekly bars show the next upside target to be in the vicinity of 35.
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GOLD JUMPS $7.00... A weaker dollar gave gold another boost today. And it came at a good time for gold. The daily chart shows gold bouncing several times off chart support in the $368-370 region. That's the peak formed in late July. In chartwork, previous peaks are supposed to become new support levels. Gold is also back above its 50-day average. As a result, gold stocks were the top group in the market today. The AMEX Gold Bugs Index gained over 5% today. The daily chart shows the $HUI finding support along its 50-day line.
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MONEY MANAGEMENT UPDATE... There hasn't been much change in the status of the technical Decision Model that we use at MurphMorris Money Management. Our Model rates the current environment as positive. In addition, three out of three of our risk measures are positive. Our indicators are also showing signs of improvement. Our technical indicators aren't geared to short-term market swings; so they weren't affected by some recent sharp down days. Our fund positions are also holding up quite well. However, we're always monitoring them -- and our indicators -- for any signs of deterioration. Our philosophy is very simple. We only hold mutual funds that show superior relative strength combined with low volatility. Most importantly, we never hold a fund that's in a downtrend.
TELECOM STOCKS DROP -- BIOTECHS BOUNCE... The Telecom group was a drag on the market today. The AMEX Telecommunications Index fell sharply. Its relative strength line has been dropping versus the S&P 500 since July, which shows its underperformance. The two biggest losers in the Dow today were AT&T and SBC Communications. Both telecom stocks have been acting poorly recently. Both fell today on heavy volume. Their weakness explains why the Dow was the only major index to close lower today. While the Dow lost 30 points, the Nasdaq gained 15. The latter market drew most of its its strength from chip stocks and biotechs.
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