A NEW BRIC ETF TRACKS WORLD'S LARGEST EMERGING MARKETS -- ASIA CONTINUES TO LEAD GLOBAL RALLY -- FALLING OIL PULLS COMMODITIES LOWER -- BUT BOOSTS AIRLINES
BRIC ETF LEADS FOURTH QUARTER GAINS... Global markets continued to lead the U.S. market higher through the end of 2006 (and the first couple of days of the new year). Every region in the world did better than the U.S. during the fourth quarter. That includes (in order of strength) Latin America, Asia (ex Japan), Europe, and Canada. [Falling commodities have started to weaken Canadian stocks]. Japan, which has also been a global laggard, did slightly better than the U.S. in last year's final quarter. To no one's surprise, the biggest gains were seen in the world's largest emerging markets. The biggest gains during 2006 came from China (+128%), Russia (+71%), India (+47%), and Brazil (+32%). By contrast, the S&P 500 gained 13% during 2006. Chart 1 shows a relatively new Exchange Traded Fund based on those four markets. It's called the Claymore/BNY BRIC ETF (EEB). [BRIC stands for Brazil, Russia, India, and China]. It started trading at the end of September and has a relatively short trading history. It does, however, provide a way to monitor and trade those four important global markets. The chart shows the fourth quarter gain of 30%. It seems fair to state that the enormous growth in those four markets is a driving force behind the global bull market in stocks.
Chart 1
CHINA CONTINUES TO LEAD THE WORLD HIGHER ... On November 2 I wrote a piece on why Asia was a good place to be investing. The Shanghai Stock Exchange Composite Index (which had been a global laggard) had just hit a new four-year high and was starting to show new upside leadership. Chart 2 shows the Shanghai market soaring 800 points (+45%) in the last two months of the old year to make it the world's strongest stock market. I also showed the more liquid Hong Kong Hang Seng Index (Chart 3) breaking through its 2000 highs. Since then, the HSI has gained another 10% (for a 2006 gain of 32%). It's not hard to see why Asia has become the world's strongest region.
Chart 2
Chart 3
COMMODITY PRICE PLUNGE ... Commodity prices came under a lot of selling today. The Reuters/Jefferies CRB Index lost 8.58 points. The technical damage done in the commodity pits can be seen in the DB Commodities Tracking Index (DBC) in Chart 4. The DBC fell to the lowest level since November and, in the process, broke its moving average lines and a three-month uptrend line. That caused selling in commodity related stocks including energy and precious metals (oil fell -$3.00 and gold -$7.50). Copper plunged 7.4% to a new seven-month low. That caused a 10% drop in Freeport McMoran Copper & Gold. The technical damage done to that mining stock can be seen in Chart 5.
Chart 4
Chart 5
FALLING CRUDE PULLS ENERGY SHARES LOWER ... Crude's drop of nearly 5% pushed it to the lowest level in nearly two years (Chart 6). That technical breakdown had a bearish impact on energy shares. The biggest percentage loser was the Oil Service Holders (OIH). Chart 7 shows the OIH tumbling below important moving average lines on rising volume. That's a bearish combination. The intensity of the selling is even more apparent in the price drop of the Energy Sector SPDR (XLE). Chart 8 shows the XLE breaking its 50-day average line in the heaviest trading in two months. The XLE is threatening its 200-day line.
Chart 6
Chart 7
Chart 8
FALLING OIL BOOSTS AIRLINES ... Falling oil prices gave a nice boost to transortation stocks today, and airlines in particular. Chart 9 shows the Airline Index (XAL) bouncing smartly off its 50-day moving average. That helped the Dow Transports climb back over its 200-day moving average. I recently wrote about the potentially negative implications of a continuing drop in the transportation group. Today's bounce is a welcome sign.
Chart 9
Chart 10
FED MINUTES CAUSE NERVOUS SELLING ... The market got off to a strong start today in an attempt to catch up to rising foreign markets which rose on Tuesday while the U.S. markets were closed. A surprisingly strong December manufacturing report added to the bullish attitude. That gave a boost to the U.S. dollar and hurt commodity markets. The release of Fed minutes this afternoon caused some nervous selling when they made mention of the Fed's continuing concern on inflation. [Today's commodity price drop should help lessen those concerns]. That spoiled what started off to be a strong day. But no serious chart damage was done. Most of the market averages closed little changed. Volume picked up noticeably, but that's in comparison to last week's holiday trading which was usually light. Chart 11 shows the NYSE Composite Index closing marginally lower on rising volume, while Chart 12 shows the Nasdaq Composite closing slightly higher on rising volume. I'm reluctant to read too much into either one. Traders will be watching to see what the market does during the first week of trading in the new year. Historically, that's been a early sign of what to expect in the coming year.
Chart 11
Chart 12
