RECENT DROP IN GLOBAL MARKETS CALLS INTO QUESTION THEORY OF GLOBAL DECOUPLING -- AGRICULTURAL COMMODITIES STILL HOLD THE LEAD -- GOLD MAY BE READY TO RALLY

GLOBAL INDEXES SHOW WEAKNESS... One of the new ideas I keep hearing is that foreign stocks are relatively immune from an economic slowdown in the U.S. While a weaker dollar has helped keep foreign markets stronger than the U.S., I'm skeptical of the theory of "global decoupling". Global markets are too closely correlated for that to happen. Foreign markets have not only sold off with the U.S. over the last month. They've started to fall faster than the U.S. Chart 1 makes both points. It shows the EAFE iShares (Europe Australasia and the Far East) falling to to a three-month low this week and breaking its 200-day moving average. The EFA/S&P 500 ratio (below chart) has also turned down over the last month after rising all year. Notice that the downturn in the foreign/U.S. ratio started when the U.S. Dollar Index (green line) started to bounce. That may only be a temporary phenomenon. But it shows that foreign stocks haven't "decoupled" from the U.S.

Chart 1

EX USA WORLD INDEX ON POSSIBLE MONTHLY SELL SIGNAL ... One of our readers asked me to take a fresh look at an index of foreign stocks. What better time to do it. Chart 2 shows the MSCI World Index ex USA (plotted through Monday). I last showed this Index during August. You may recall last Friday's Market Message showing that the NYSE Composite Index was in danger of giving its first monthly MACD sell signal since the U.S. bull market started more than four years ago. Chart 2 shows that the MSWorld Index of foreign stocks is in danger of giving a monthly MACD sell signal as well. That suggests that the global bull market could also be in jeopardy. [I repeat again that these monthly signals are not "official" until the end of the month. In mid-August, this index and the NYSE also gave preliminary sell signals. Those signals were erased by a late August rally. That makes market action between now and yearend especially important]. My main reason for showing this chart is to demonstrate that global markets haven't decoupled and aren't likely to.

Chart 2

EMERGING MARKETS HOLD UP BETTER ... Emerging market stocks are holding up best of all. But even they aren't immune to selling. Chart 3 shows the MSCI Emerging Markets iShares (EEM) threatening their November lows (and possible their 200-day line). Up until late October, emerging markets had been the world's strongest stocks. Their relative strength line (below the chart), however, has also started to slip over the last month versus the U.S. Chart 4 also argues against complacency in emerging markets. It plots the EEM versus the S&P 500 (the zero line). In effect, it's an EEM/SPX ratio. The ratio peaked in late October and is in danger of breaking its November low. During the last three market corrections (May 2006, February-March 2007, and August 2007), emerging markets fell faster than the U.S.in all three instances (see red arrows). Based on that history, how can we conclude that emerging markets will hold up better than the U.S. this time -- especially if the latter enters a bear market?

Chart 3

Chart 4

WATCHING 200-DAY LINES... As of last night, all major stock indexes in the U.S. had closed below their 200-day moving averages. A quick glance at global ETFs (from the Market Summary page) shows 11 foreign countries also trading below their 200-day lines (including Austria, Belgium, France, Italy, Japan, Mexico, Netherlands, Sweden, Switzerland, Taiwan, and the UK). Foreign ETFs testing their 200-day lines include Australia, Canada, Singapore, and South Korea. That's not exactly a picture of global strength. Even China isn't immune. Chart 5 shows China iShares (FXI) touching a three-month low this week. Since the start of November, the FXI has actually fallen faster than the U.S.

Chart 5

AGRICULTURE IS STILL IN THE LEAD... Another reader asked if I still believed that agricultural markets stood the best chance of withstanding any commodity downturn. Let's look at the recent record. Chart 6 plots four commodity groups relative to the Reuters/Jefferies CRB Index (flat line) since the start of 2006. The top performer is agriculturals (blue line), which are mainly grains and soybeans. Behind them are precious metals (green line) and energy (red line). Those two groups have pulled back recently as the U.S. Dollar has bounced. The weakest group is Industrial Metals (pink line). The breakdown in industrial metals since the spring is a warning of global slowing. The fate of gold and oil may rest with the dollar. Agricultural markets, however, aren't tied to the business cycle. They're dependent on global weather conditions, the fact that it takes time to plant and grow new crops, and the recent trend toward ethanol production. The last factor has produced bigger corn crops at the expense of other grains. A global economic slowdown could very well lead to some weakness in commodity markets. Even if that happens, agriculatural markets should still hold up best of all.

Chart 6

THIRD PULLBACK MAY BE CHARM FOR GOLD... The gold market has been trending sideways since early November. Chart 7 shows the streetTracks Gold Trust (GLD) bouncing off its 50-day average for the third time in a month. That's important because the six-week trading range has the look of a bullish "symmetrical triange", which is shown more clearly in the hourly bars in Chart 8. That pattern is characterized by two converging trendlines. Since it's a "continuation" as opposed to a "reversal" pattern, technical odds favor an eventual upside breakout. Prices need to close above the top trendline (and preferably the December closing high at 80.72) to signal a short-term buy. Triangles normally have three pullbacks before turning higher. The last pullback for gold was the third one. In technical work, the third time is often a charm.

Chart 7

Chart 8