JAPANESE STOCKS RESUME UPTREND -- RISING YEN BOOSTS GOLD -- EUROPEAN STOCKS BOUNCE OFF 200-DAY LINES -- FALLING OIL HELPS THE TRANSPORTS
JAPAN ISHARES RESUME UPTREND... With all of the recent concern about a global stock market correction, the Japanese market has been quietly resuming its uptrend. It was by far the world's strongest market this week. The weekly bars in Chart 1 show the AMEX Japan iShares climbing to a nearly three-year high which was topped off by a 2% gain at week's end. The relative strength line along the bottom (which plots the Japanese market against the S&P 500) has also broken out to the upside. One of the maxims of market analysis is that markets that hold up the best during a downside correction become leaders on the next upleg. On both counts, that makes Japan a global leader. Money flowing into Japan is also boosting the Japanese yen, which climbed to a five-week high against the dollar.
Chart 1
JUMP IN YEN BOOSTS GOLD... There's been a lot of speculation recently about why gold has been rallying in the face of a week Euro. One explanation may be that gold is following the trend of the yen instead. Charts 2 and 3 compare the last six month trends in the yen and gold. There appears to be some correlation. Although gold's peak in January took place a month before the yen started dropping, their respective bottoms occurred together in early March. Since then, both have been rising. The yen (plotted through Thursday) has reached the highest level in more than a month, while gold has climbed to the highest level since early January. Gold stocks also ended the week on a strong note. The strength in the yen is tied to money flows into the Japanese market and more convincing signs of economic strength. A key question, however, will be whether the Japanese central bank intervenes to prevent an upside breakout in the yen.
Chart 2
Chart 3
EUROPEAN MARKETS BOUNCE OFF 200-DAY AVERAGES... While Asia has been the world's strongest region, Europe has been the weakest. Two of the big European markets -- Britain and Germany -- have declined right along with the U.S. market. And both have reached a key support level around their 200-day moving averages. Both markets rebounded on Thursday along with the U.S. market as shown in Charts 4 and 5 (plotted through Thursday). The FTSE actually touched its 200-day line before turning higher. In the states, only the Nasdaq market reached that long-term support level but helped lead Thursday's global bounce. If this week's rebound in the U.S. is going to hold, it's important that the European markets stabilize as well. Their 200-day line would be a logical spot for that to happen.
Chart 4
Chart 5
BIG-CAP GROWTH APPEARS TO BE STABILIZING... Throughout the recent stock market correction, large-cap value stocks held up much better than growth stocks. Their relative performance can be seen in the next two charts. Investor preference for value may be indicative of greater caution. My main point in showing the two charts, however, is that the S&P Large Cap Growth Index in Chart 7 is bouncing off its 200-day moving average. A key point in any market decline occurs when the market's weakest groups reach their 200-day averages. That's been the case with the Nasdaq market and large cap growth stocks. Their ability to bounce off that long-term support line is an encouraging sign for the entire market.
Chart 6
Chart 7
TRANPORTS ARE BACK OVER 200-DAY LINE... One of the factors supporting this week's market rebound has been the drop in crude oil prices. One market group that should benefit from softer oil prices is transportation. And it came just in time. That's because the Dow Transportation Average has also fallen to its 200-day moving average. Chart 8 shows the Transports ending the week north of that major support line. It got a lot of help from a strong rebound in airline shares. Also encouraging is the fact that the daily stochastic lines have turned up, and the daily MACD lines are turning positive. Even the relative strength line, which has been falling since the start of the year, is rebounding. It's pretty hard for the Dow Industrials to sustain a meaningful advance while the Transports are falling. That's why the rebound in the latter is a good sign. I know it seems like all I'm looking at are 200-day moving averages. But I happen to think that there's an important message there. One of the ways chartists can tell if a market drop is just an intermediate correction, or the start of a new bear market, is the ability to stay over the 200-day moving average. Naturally, the weakest groups will get there first. The fact that they held this week is a positive sign that the worst may be over.
Chart 8
VIX FALLS BACK BELOW 20... Earlier in the week I expressed concern about the CBOE Volatility (VIX) Index rising over the 20 level for the first time in nearly six months. Historically, a move in the VIX above 20 is usually associated with more downside action in stocks. That's because the VIX and stock market trend in opposite directions. By week's end, however, the VIX fell back below the 17 level (and its 200-day moving average), which moves it back below the danger area. It's still low by historic standards. But at least it isn't going up.
Chart 9
