MORE ON HOW CURRENCIES IMPACT FOREIGN ETFS -- REITS AND HOMEBUILDING STOCKS SHOW NO SIGN OF BOTTOM -- DOW'S POINT & FIGURE TREND IS STILL UP

MORE ON CURRENCY MOVES ... One of our readers complained that Chart 6 in last Friday's update made no sense. It had to do with why a weaker yen hurt the relative performance of Japan iShares (EWJ). I'll take another shot at it because it can be confusing. The green line in Chart 1 is the Japanese yen. The red line is a ratio of the EWJ divided by the Nikkei 225. The falling ratio means that the iShares are underperforming the Japanese cash market. That's the direct result of a weak yen. Chart 2 shows the opposite effect. The green line is the British Pound. The red line is a ratio of United Kingdom iShares (EWU) divided by the FT 100 (FTSE). In that case, both lines are rising. British iShares are doing better than the British cash market. That's due to the strong pound. The reason in both cases is this. Foreign iShares are quoted in U.S. Dollars. Foreign cash markets are quoted in their local currencies (pounds and yen). The entity quoted in the weaker currency will rise faster. Therefore, the Nikkei (quoted in yen) will rise faster than the EWJ (quoted in dollars) when the yen is weaker than the dollar. By contrast, the EWU (quoted in dollars) will rise faster than the FTSE (quoted in pounds) when the dollar is weaker than the pound. Since we're comparing those currencies to the U.S. Dollar, this analysis applies only to American investors.

Chart 1

Chart 2

NO SIGN OF HOUSING BOTTOM YET... It never ceases to amaze me how often I hear economists on TV claiming that we're either at or near a bottom in housing. As far as I can see, there's absolutely no evidence to support that optimistic view. They'd do well to look at the charts of REITs and homebuilders for better clues as to the direction of housing. Chart 3 shows that the PHLX Housing Index peaked two years ago and has been doing badly ever since. The recent rally attempt failed at a two-year down trendline. The group's relative strength ratio has fallen to the lowest level in four years. If and when housing does bottom, we'll probably see it in that chart first. Chart 4 shows the Dow Jones REIT Index also turning lower. The DJR is threatening to break a three-year support line. The DJR/S&P ratio (top of chart) has already done that. Stocks discount the future. Apparently, stock traders don't see any sign of a bottom either.

Chart 3

Chart 4

DOW P&F TREND IS STILL UP... Charts 5 and 6 show two point & figure charts for the Dow. Chart 5 is more sensitive than Chart 6. Chart 5 assigns a value of 50 Dow points to each box. A short-term sell signal was given earlier in June at 13400. That sell signal was negated, however, when the last x column exceeded the previous x column at 13500. To resume its uptrend, the Dow needs to close at 13700 or higher. To give another sell signal, it would have to close at 13250 or lower. One problem with p&f charts is that we have to assign a value to each box. As prices move higher, so should the value of each box. Chart 6 takes care of that problem. It assigns a constant percentage value of 1% to each box. That automatically increases the actual box size as prices move higher. I think it's the better way to do it. As a result of that less sensitive box size, no sell signal was given in Chart 6. When using the "percentage" scale, the Dow has been on a buy signal since January 2006 at 10780. Two additional buys were given at 11330 (last August) and 12895 (this April). In Chart 6, the Dow would have to close at 13154 or lower to issue the first sell signal in nearly two years. Charts 7 and 8 show p&f uptrends for the S&P 500 and Nasdaq (using 1% box sizes).

Chart 5

Chart 6

Chart 7

Chart 8

MORE P&F TRENDS ... The beauty of point & figure charts is their simplicity. It's easy to tell whether the trend is up or down. There's no guarantee those trends will continue. But there's little doubt about the current trend's direction. That being the case, let's look at four other p&f charts using 1% scales to determine their current p&f trend. Chart 9 shows the 10-Year Treasury Note Yield in a p&f uptrend. Chart 10 shows the U.S. Dollar Index in a downtrend. Chart 11 shows crude oil in an uptrend. Chart 12 shows the Reuters/Jefferies CRB Index in a p&f uptrend. The CRB needs a close at 324.72, however, to achieve a major bullish breakout.

Chart 9

Chart 10

Chart 11

Chart 12