WEEKLY STOCK INDICATORS REMAIN NEGATIVE -- TELECOM HOLDERS ARE TOP ETF FOR THE WEEK -- MEDIMMUNE IS ANOTHER HEALTHCARE BREAKOUT -- CHINESE SANCTION WEIGH ON DOLLAR

CHINESE SANCTION WEIGH ON DOLLAR AND BONDS ... A Commerce Department announcement on Friday of new sanctions on imports from China took the markets by surprise. Bonds, the dollar, and stocks took the news badly. The biggest potential losers are bonds and the dollar. The Chinese are huge holders of dollar reserves, which they invest in U.S. Treasuries. Chinese retaliation might include the selling of the dollar and U.S. bonds. That would push the dollar lower and U.S. interest rates higher. That thinking explains why the dollar dropped today on the news while bond yields rose. Gold prices bounced on the falling dollar. A weaker dollar, combined with higher prices for Chinese imports, would increase U.S. inflation. None of these things are good for the stock market or the economy. It is good for gold and foreign currencies, however. A falling dollar also makes foreign investments more attractive. As the dollar has fallen this past week, foreign markets have done better than the U.S. The top foreign ETFs for the week were in Germany, Spain, Mexico, and Australia. All did better than the U.S. Chart 1 shows the EAFE Index iShares trading well above its 50-day moving average (while most U.S. stock indexes are below that support line). The EAFE/S&P 500 relative strength ratio on top of Chart 1 hit a new record high this week. A weaker dollar is part of the reason for that.

Chart 1

WEAK DOLLAR FAVORS FOREIGN ETFS ... I've shown this chart several times before, but here it is again. The green line is the U.S. Dollar Index since the start of 2006. The red line is a ratio of the EAFE iShares (EAF) divided by the S&P 500. [EAFE is the benchmark for foreign stocks and stands for Europe Australasia and the Far East]. A rising ratio means that foreign stocks are doing better than the U.S. Notice that the two lines move in opposite directions. Downturns in the dollar in the first and fourth quarters of last year pushed the EAFE/S&P ratio higher and favored foreign stocks. A bounce in the dollar last May started a pullback in the ratio (U.S. outperformance) that lasted until October. The first quarter dollar slide has pushed the ratio to a new record. That's why any Chinese selling of the dollar (or just buying fewer dollars) would benefit foreign currencies and foreign stocks.

Chart 2

TELECOM IS TOP ETF... Last Friday I wrote a bullish story on the telecom sector, which is another defensive sector that's been rising since last summer. I thought it worth pointing out that the Telecom Holders (TTH) were the top performing sector ETF for the week. Chart 3 shows the TTH on the verge of another multi-year high. Its relative strength ratio continues to rise as well. I focused on bullish trends in AT&T and Verizon last week and only briefly touched on Qwest Communications. Chart 4 shows that Qwest is now challenging the highs of last September. A close through that barrier would put the telecom stock at a new five-year high.

Chart 3

Chart 4

ANOTHER HEALTHCARE BREAKOUT... In my quest for breakout stocks in the healthcare sector, I showed Abbott Labs on Monday and Schering Plough yesterday. Chart 5 shows Medimmune breaking through its January highs today in pretty decisive fashion. Its relative strength ratio (top of chart) has broken out as well. Volume has also been rising which is a good sign. As impressive as that breakout is, the weekly bars in Chart 6 show that the biotech leader may be approaching an even more impressive one. That's because the stock is nearing a challenge of its late 2005 peak at 37.58. A close through that chart barrier would put the stock at a new three-year high. Chart 6 also shows the stock's relative strength (RS) line rising since last summer. The monthly bars in Chart 7 may be the most impressive of the three charts. They show MEDI in an apparent bottoming formation since mid-2002 between 20 and 40. I've drawn a "neckline" over the 2003-2005 peaks which is now being challenged. That would make a close over 37.58 even more bullish.

Chart 5

Chart 6

Chart 7

TYSON FOODS LEADS CONSUMER STAPLES... Let's not forget some consumer staple stocks that are turning in strong performances. I've mentioned Tyson Foods a couple of times already as a consumer staple leader. The stock caught my eye today because it was the top gainer in the consumer staples SPDR (XLP). The monthly bars in Chart 8 show the stock trading at a new 52-week high and having broken a three-year down trendline. The stock appears headed for a test (and probable penetration) of its 2004 peak at 20.82. Its relative strength ratio (gray line) is rising and has also broken a three-year down trendline.

Chart 8

WEEKLY MACD LINES ARE IMPROVING BUT STILL NEGATIVE ... Following the previous week's Fed-inspired rally, the market gave back a little this week. Although the drop wasn't severe, it was enough to push the major stock indexes back below their 50-day moving averages. Short-term readings aren't very conclusive at the moment. That's why it's a good idea to look at the weekly chart for a clearer read on the market's trend. It's important to recognize, for example, that the weekly MACD lines for the S&P 500 are still negative as shown in Chart 9. The more sensitive black line has to cross back over the red line to give another buy signal. The improvement is seen in the MACD histogram bars at the bottom of Chart 9. The histogram has been below the zero line (a sell signal) for the last five weeks. [The histogram measures the difference between the two MACD lines]. The improvement comes from the fact that the histogram bars (although still negative) are rising a bit. If you look back to last spring, for example, you'll see that the histogram starts rising weeks before a positive crossing. A rising histogram simply means that the two MACD lines are starting to converge a bit. Traders often take that as a signal to cover some short positions, but not to take new long positions. The histogram bars have to cross back over zero to issue an intermediate buy signal. The daily MACD lines have turned positive. The weekly lines, however, are more important. And they're still negative.

Chart 9