FALLING DOLLAR GIVES BIG BOOST TO FOREIGN STOCK ETFS -- NASDAQ TOUCHES NEW 52-WEEK HIGH -- CHIPS HAVE STRONG DAY
FOREIGN ETFS CONFIRM US BREAKOUT ... One of the recent concerns among market analysts was the lack of upside confirmation by foreign markets. Although most of the U.S. stock indexes have cleared their spring highs, foreign markets had been lagging behind. That's no longer the case. Chart 1 shows the EAFE Index iShares (EFA) breaking decisively over their May 2006 highs. [EAFE stands for Europe Australia and the Far East]. What's more, foreign stock ETFS may start outperforming the U.S. market once again. Last week I wrote about how a falling U.S. Dollar had two principal side effects. One was higher precious metal prices. Another was stronger foreigns stocks. That's especially true of foreign ETFs which are quoted in dollars. They do even better than their local markets which are quoted in local currencies. The relative strength ratio below Chart 1 plots the EFA divided by the S&P 500. The ratio peaked in May and has been trading sideways in a "triangular" shaped pattern. The ratio has just broken the upper resistance line (see circle) and appears to be breaking out to the upside. The upside breakouts are widespread. Among the foreign ETFs hitting new 52-week highs today are Australia, France, Germany, Hong Kong, Italy, Malaysia, Mexico, Singapore, Spain, Sweden and the United Kingdom.
Chart 1
CHIPS HAVE A STRONG DAY ... Part of the reason the Nasdaq market has turned so strong over the last couple of days is the resurgence in chip stocks. Just last week, the Semiconductor (SOX) Index had slipped below its 50-day moving average and was threatening its October lows. Not anymore. The daily bars in Chart 2 show the SOX surging more than 2% today to reach a new two-week high. It's nearing another challenge of its 200-day moving average. One of the reasons is the 5% gain in Altera. Chart 3 shows ALTR clearing its 200-day line on very strong volume. A number of other chips stocks had strong days including Broadcom and Novellus. The new buying of chips helped the Nasdaq market touch a new 52-week high today.
Chart 2
Chart 3
A NEW WRINKLE ON MOVING AVERAGES ... In the weekend newsletter, Chip Anderson described a modification to the plotting of moving averages. I requested that change based on a presentation I saw in Europe last week. It's now possible to plot moving averages of ""highs"" and ""lows"" (and opens) as well as the more standard closing prices. Why would we want to do that? Chart 4 plots two 20-day moving averages. The blue line is the standard 20-day moving average of closing prices of the Nasdaq 100 Shares (QQQQ). The red line is a 20-day average of the lows. If you look closely, you'll see that the lower average has acted as a slightly better support line than the upper average. The theory is this. In an uptrend, a moving average of "lows" is a better support line than an average of the closes. In a downtrend, a moving average of the "highs" acts as a better resistance line. I haven't worked with moving averages of the highs and lows long enough to reach any hard conclusions as to their value. But I'm going to be experimenting with them. You might want to do the same. [The m.a. of a "low" is found by adding ,l to the m.a. value; eg, type 20,l in the above example. For a m.a. of the "highs", type 20,h].
Chart 4
NASDAQ TOUCHES 52-WEEK HIGH ... The Nasdaq Composite Index touched a new 52-week high today, but didn't close there. The weekly bars in Chart 5 show the Nasdaq still testing its spring high. The market has bounced impressively going into today's mid-term election although upside volume hasn't been impressive. The key will the type of follow-through after the election results are reported. The Nasdaq still needs a decisive close over its spring high at 2378 to register a bullish breakout.
Chart 5
