COMMODITY BOUNCE DOESN'T LAST -- EMERGING MARKETS AND SMALL CAPS TEST 200-DAY AVERAGES -- NEW DOW LEADERSHIP IS A SIGN OF A DEFENSIVE MARKET
CRB GIVES UP ALL OF YESTERDAY'S GAINS ... Yesterday's sharp jump in commodity prices didn't last for long. The CRB Index fell more than nine points today to give up all of yesterday's gains and more. Three of the biggest percentage losers were copper (-6%), gold (-5.3%) and silver (-4.9%). Energy prices fell as well. That caused heavy selling in their related stocks which also gave back all of yesterday's price gains.
Chart 1
GOLD ETF RESUMES DOWNTREND ... Chart 2 shows the streetTracks Gold Trust Shares (GLD) falling the equivalent of $40 and trading at a new monthly low. It's nearing a test of its 50-day average near 62. The dots on the daily bars show the current position of the Parabolic SAR dots. You may recall my pointing out a sell signal given on Monday, May 15 when the lower stopout point was hit (red circle). No buy signal has yet been given. Although the SAR system hasn't worked as well on gold stocks, they haven't given new buy signals either. Chart 3 shows the Gold & Silver (XAU) Index gapping down 5% today. Energy shares fell today as well. Chart 4 shows the Energy SPDR (XLE) retesting its 200-day moving average once again. Today's downside volume is greater than yesterday's upside volume. It's hard to measure the exact impact of commodity stocks on the rest of the stock market. Rising commodity stocks do provide some support to the market. When commodities and their related stocks fall (like today), that weakens the inflation argument (which is good) but also hints at economic weakening (which is bad). That's especially true of industrial commodities like copper. On balance, my best guess is that falling commodity stocks are probably more bearish than bullish for the rest of the market at this point in time. That's especially true for emerging markets which fell heavily again today.
Chart 2
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EMERGY MARKET ETF NEARS 200-DAY LINE ... On Monday I showed the recent breakdown in the Emerging Markets iShares (EMM) and suggested that it was headed toward its 200-day average. It's just about there. Notice the very heavy volume that's accompanied the May downturn in prices. Notice also the breakdown in the ratio of the EEM to the S&P 500. The heavy selling of emerging market stocks is part of the global flight out of riskier assets into more defensive ones -- like Treasury bonds, consumer staples, utilities, etc. Small cap stocks have also been under heavy pressure. They too are in the process of testing their 200-day support line.
Chart 5
SMALL CAPS TEST 200-DAY AVERAGE ... The market has reached a moment of truth of sorts. That's because so many stock (and group) indexes have reached their 200-day moving average. Although the market hasn't been able so far to stage much of a rebound, it's putting up a battle around those long-term support lines. The next chart shows the S&P 600 Small Cap Index bouncing off its 200-day line today. The chart after it shows the S&P Large Cap 500 Index closing just above the 200-day line after breaking it early today. It also remains in a short-term oversold condition. All that tells me is that the market has fallen too far, too fast and is stabilizing a bit. The longer-term picture, however, still looks ominous. And it's the long-term term picture that really matters.
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WHAT'S THE MESSAGE OF NEW DOW LEADERSHIP... On March 8 I wrote an article entitled "New Dow Leadership Is A Sign of A More Defensive Market"( March 08, 2006). [Coincidentally, the other two headlines dealt with weakening commodity prices and rotation out of energy stocks into consumer staples]. My main focus here, however, is with the Dow. Although the story proved to be premature (the market continued to rally for another two months), the basic theme is worth a second look. The media often point to the strength in the Dow Industrials as a sign of a healthy stock market and investor confidence. It's just the opposite. Investors flock to the relative stability of the large Dow stocks when they start to lose confidence. [The March article also suggested that money moving into Dow stocks usually comes out of small caps and emerging markets. Sound familiar?].
Chart 8
DOW OUTPERFORMS FOR FIRST TIME IN THREE YEARS... Chart 8 plots a ratio of the Dow Industrials divided by the S&P 500. The line had been dropping since the spring of 2003 when the stock market began its latest bull run. The chart shows the ratio breaking a down trendline extending back two years. [The last time that ratio bottomed was in 2000 as the stock market was peaking]. At a stock market bottom, money tends to flow into growth areas like small caps and technology. The Dow usually gets left behind. At market tops, the reverse is true. Money moves out of smaller stocks and technology and into the relative safety of the Dow industrials. Part of the reason for the Dow leadership is that it's populated with a lot of defensive stocks. As an example of that, the top three percentage gainers over the last two weeks have been Johnson & Johnson, Coca Cola, and Wal Mart. [The first two are traditional defensive stocks, while WMT is one of the biggest holdings in the Consumer Staples ETF]. So don't be fooled by the new Dow popularity. As I wrote on March 8, "the new Dow popularity isn't a vote of confidence in the rest of the market or the economy". It may be just the opposite.
