STRONG JOBS NUMBER PUSHES RATES HIGHER ALONG WITH THE DOLLAR -- GOLD IS HIT HARD -- FALLING COMMODITIES CAUSE SELLING IN EMERGING MARKETS -- SMALL CAPS WEAKEN -- LOOK FOR WEEKEND UPDATE
JUMP IN JOBS AND WAGES BOOST INTEREST RATES ... Today's report of an unexpected jump in new jobs during the month of December -- combined with a 0.5% jump in wages (for an annual rate of 4.2%)-- raised inflation concerns and is causing a jump in interest rates today. That's having a pronounced ripple effect in other markets. Higher U.S. rates are boosting the U.S. Dollar which is pushing gold sharply lower (along with other commodities). The threat of higher rates is also causing heavy selling in the stock market. Basic materials tied to commodities are week once again. Rate-sensitive utilities are one of the day's weakest groups. Small caps are also leading the day's decline. Emerging markets are leading a retreat in global stocks as well. Two of the day's weakest ETFs are in Brazil and China.
Chart 1
EMERGING MARKETS ARE OFF TO A BAD START... Emerging market stocks, which led the fourth quarter global stock market rally, are off to a bad start in the new year. A lot of the selling is tied to the week's sharp drop in commodity markets. Chart 2 shows MCSI Emerging Markets iShares (EEM) losing nearly 3% today. The daily MACD lines in Chart 2 have also turned negative. That's symptomatic of a short-term top. The real test of the EEM uptrend will come at its 50-day moving average. Two of the weakest emerging markets are Brazil and China were were also fourth quarter leaders. Chart 3 shows the FTSE/Xinhua China Fund (FXI) tumbling more than 5% today. The daily stochastic lines have fallen below 80 for the first time in a month. Another sign of a short-term top. Brazil iShares (EWZ) are down more than 3%. Downside volume over the last three day's in the EWZ has been especially heavy. And it's dangerously close to its 50-day moving average. [The BRIC ETF (EEB) that I showed on Wednesday is down nearly 3% on the day]. The weekly bar charts for emerging markets will look especially ugly this week. That's because they'll show downside weekly reversals on very heavy volume. [That occurs when markets open higher and close lower on the week]. That's casting a pall on most global stock markets.
Chart 2
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Chart 4
RISING DOLLAR PUNISHES GOLD ... Today's jump in U.S. interest rates has boosted the U.S. Dollar and pushed the Euro to the lowest level in six weeks. Chart 5 shows the Euro threatening its 50-day average. That's having a very bearish impact on gold and gold stocks. Chart 6 shows the StreetTracks Gold Trust (GLD) tumbling to a two-month low on heavy volume. Chart 7 shows the Market Vectors Gold Miners ETF (GDX) doing the same. Both have violated their 200-day moving averages. Gold stocks are now suffering the same fate that energy stocks did earlier in the week. Many emerging markets tied to commodities are being hurt as a result. As are basic material stocks.
Chart 5
Chart 6
Chart 7
BASIC MATERIALS AND UTILITIES BREAK 50-DAY LINES... The fact that basic materials and utilities are rolling over may not seem to make a lot of sense. Charts 8 and 9 show both ETFs breaking their 50-day moving averages. The selling in basic materials is easier to understand since that group contains stocks tied to commodities like copper and gold. The selling in utilities may be due to two factors. One is today's sharp jump in interest rates. Utilities usually benefit from falling rates. The other is the fact that many utility stocks are tied to the price of natural gas which has tumbled this week. That's due mainly to unseasonably warm weather in the northeast. [Saturday's temperature in New York is expected to hit 60 degrees]. The reasons aren't all that important. The fact that the XLB and the XLU are breaking their 50-day lines may encourage selling in both groups.
Chart 8
Chart 9
SMALL CAPS WEAKEN ... Small caps are also suffering some technical damage. Chart 10 shows the S&P 600 Small Cap Index in danger of closing below its 50-day moving average for the first time since last August. The chart also shows that the SML still hasn't cleared its May high near 406. That puts it up against a potential resistance barrier. The relative strength ratio along the bottom of Chart 10 shows how much small caps have lagged behind large caps since last May. That pattern should continue as the historically long age of this bull market (nearly four years) is driving investors to large cap dividend paying stocks. The bigger question is whether a short-term top in small caps will lead to some profit-taking in large caps as well.
Chart 10
LOOK FOR WEEKEND UPDATE ... In view of today's unusually volatile price action, I'm going to publish a Saturday market messsage after the dust has settled a bit and all the technical numbers are in. Today's closing prices -- and the level of volume -- will play an important role in determining how much -- if any -- damage is being done to the market's uptrend. I'll also review some of the market's longer-term technical indicators.
