FIRMING DOLLAR IS CAUSING WORLD MARKETS TO LAG BEHIND THE U.S. -- WORLD INDEX HAS ALREADY REACHED MAJOR RESISTANCE BARRIER
WORLD INDEX IS LAGGING BEHIND THE US ... I ended last night's message with the following chart to show that foreign stocks have been lagging behind the U.S. during the recent rally. The black bars in Chart 1 show the S&P 500 challenging its May peak. At the same time, the Dow Jones World Stock Index (red line) is still well below its spring high. That shows that the U.S. market is rising faster than foreign stocks. That message is seen more clearly by the DJW/S&P ratio at the top of Chart 1. Heading into May, the rising ratio showed outperformance by foreign markets. Since May, however, the ratio has been dropping which shows foreign underperformance. This is the first time in several years that the foreign markets have lagged behind the U.S. As I suggested yesterday, I believe the recent firmness in the U.S. Dollar has something to do with that.
Chart 1
FIRMING DOLLAR HURTS FOREIGN STOCKS ... The point of Chart 2 is to determine if there's a link between the direction of the U.S Dollar Index (green line) and the relative performance of foreign stocks. The chart seems to suggest that there is a direct link. The red line is the same ratio shown in Chart 1 which is the Dow Jones World Stock Index (DJW) divided by the S&P 500 (representing U.S. stocks). When the red line is rising, foreign stocks are stronger than U.S. stocks. Notice that the DJW/S&P ratio bottomed in early 2002 (first red arrow) just as the dollar was peaking (first green arrow). That suggested that a weaker dollar made foreign stocks more attractive than U.S stocks. To the far right, however, a firmer dollar (second green arrow) is coinciding with a downturn in the ratio, which shows that foreign stocks are starting to lag behind the U.S. for the first time in four years. It's too soon to call this a major change in trend. But it does suggest that the direction of the U.S. dollar may help determine whether foreign stocks or the U.S. is the better place to be.
Chart 2
WORLD INDEX HAS REACHED ITS OLD HIGH ... There may be a technical reason why world stocks have started to slip versus the U.S. market. Chart 3 shows that the Dow Jones World Stock Index (red bars) has already reached a potential resistance barrier at its 2000 peak. The S&P 500 (black line), however, is still more than 200 points (or 15%) from its all-time high. The chart may be suggesting that, while the uptrend in foreign stocks is stalling, the U.S. is still playing catch up. The bad news in the chart is that the global bull market that started in 2003 has regained all of the losses suffered from 2000 to late 2002. That puts it in a potential long-term resistance area and may limit further upside gains. Given the high correlation among global markets, that may also limit the upside potential in the U.S. market.
Chart 3
