LATIN AMERICA LEADS EMERGING MARKETS LOWER -- FALLING COMMODITIES ARE HURTING BOTH -- SOX SELLING PULLS DOWN ASIAN MARKETS AND THE NASDAQ
RISING RATES HURT RISKIER MARKETS ... This week's upside breakout in U.S. bond yields, and prospects for more global tightening of short-term rates, takes a toll on riskier markets. That certainly includes emerging markets which are falling hard today with average losses of 3%. What's more, Chart 1 shows the MCSI Emerging Market iShares (EMM) falling below their February low and 50-day moving average. The relative strength line has also turned down relative to the U.S. market. Most of the selling in the EEM appears concentrated in Latin America, and Brazil and Mexico in particular. Chart 2 shows Mexico iShares (EWW) falling back below their 50-day line. Downside volume has been especially notable over the last week. Part of the Mexican selling is due to a falling Mexican peso. Chart 3 shows Brazil iShares (EWZ) bearing down on their 50-day average. Downside volume is picking up there as well. The daily MACD lines for the EWZ have turned negative. Another factor which may be hurting Latin America and emerging markets is the recent drop in commodity markets -- and energy in particular. Energy and materials comprise 28% of the Emerging Markets iShares and 26% in Latin America. The materials sector is the heaviest weighting in both. With commodities and their related stocks coming under selling pressure, a lot of steam is being taken out of emerging markets. Energy-dependent markets like Russia are also falling today. In my view, that shows that rising bond yields (and falling commodities) have raised the risk level for global equities in general.
Chart 1
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SOX BREAKS 50-DAY LINE... Another factor weighing on emerging markets -- and Asia in particular -- is today's drop in semiconductor shares. Chart 4 shows the Semiconductor (SOX) Index falling beneath its 50-day line for the first time in four months. Its relative strength ratio is also starting to fall. That's weighing on Asian markets in South Korea and Taiwan which have an especially high semiconductor weighting. Charts 5 and 6 show Taiwan iShares (EWT) and South Korea iShares (EWY) trading below their 50-day lines and hitting new 2006 lows. That technology weakness is also weighing on the Nasdaq market.
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NASDAQ AND S&P SLIP UNDER 50-DAY LINES... Chart 7 shows the Nasdaq Composite slipping beneath its 50-day line in afternoon trading. A close beneath that support line would signal a probable test of its mid-February low. The Nasdaq/S&P 500 relative strength ratio, which bottomed in October, also appears to be weakening. That's bad for both the Nasdaq and the S&P. That's because the Nasdaq usually leads the S&P to the upside and to the downside. Right now, it appears to be to the downside. Chart 8 shows that the S&P 500 is also slipping under its 50-day line. I suggested yesterday that the S&P appeared headed for a test of its February low at 1253 as part of a possible "double top" (see red circles). That will be a very important test for the S&P and the rest of the market which is suddenly looking a lot riskier.
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