FOREIGN STOCKS ARE FALLING FASTER THAN THE U.S. -- WHEN FOREIGN CENTRAL BANKERS START LOWERING RATES, FOREIGN STOCKS WILL LOSE DOLLAR TAILWIND -- GLOBAL STOCK DOWNTURN APPEARS TO BE RESUMING

SAME BEAR SIGNALS APPLY TO FOREIGN STOCKS... One of our readers asked if the same bearish technical indicators that I've been showing for the U.S. market apply to foreign markets. The answer is "yes". Chart 1, for example, shows a monthly MACD signal on the EAFE iShares for two consecutive months. I've also written recently about how foreign markets were actually starting to fall faster than the U.S. market since the start of the new year. That trend continued even today.

Chart 1

FOREIGN STOCKS ARE FALLING FASTER ... Today was a bad stock day all around the globe. The S&P 500 fell -3.2%. Foreign stocks did even worse. EAFE iShares (Chart 2) lost -4.3% while Emerging Market iShares (Chart 3) fell an even worse -5%. That weaker action by foreign stocks can be seen in their relative strength ratios. The EFA/S&P ratio in Chart 2 peaked during November and has fallen noticeably since then. The EEM/S&P ratio (Chart 3) has held up a little better, but it too is down since the start of the year. There are a couple of messages here worth noting. The first is that the myth of "global decoupling" is being discredited with each passing day. The second is that foreign economies are starting to weaken along with the U.S. That may explain why the Euro had one its worst days in recent memory, and the U.S. Dollar jumped against most foreign currencies.

Chart 2

Chart 3

ECB HAS FALLEN WAY BEHIND THE CURVE ... During my recent visit to Europe I made the point that, with European stock indexes starting to fall sharply, the European Central Bank (ECB) was falling too far behind the curve. The Fed has been lowering short-term rates since August. Its last two aggressive rate cuts was an admission of how far behind the curve it had fallen. The ECB, by comparison, is still threatening to raise rates to combat inflation. Talk about being out of touch with the markets and reality. Some weak economic news out of Europe today pushed the Euro -1.1% lower (Chart 4). The reality is just starting to set in that the ECB (and other foreign central bankers) is going to have start lowering rates pretty soon. The immediate effect of that would be to weaken foreign currencies and strengthen the dollar. We may have seen the start of that process. Today's dollar jump also explains sharp selloffs in gold and other commodities. Another side-effect of a stronger dollar is that it works against foreign stocks which have been riding the tail-wind of a falling dollar for the last five years. When foreign bankers like the ECB start to play catch-up with the Fed in lowering rates, those dollar tailwinds will starting turning into dollar headwinds for foreign stocks.

Chart 4

BEAR MARKET BOUNCE HAS ENDED ... After todays rout, there seems little doubt that the two-week bear market rally has ended. First of all, it ended right where it should have, which is just below its November low. Chart 5 shows the S&P 500 SPDRs failing just below its November low at 140. We had suggested last week that was a likely spot for new selling to appear. And it has. Today's sharp drop came on heavier volume. Big board decliners swamped advancers by a four-to-one margin. Nothing escaped the selling. Every market sector and industry group ended in the red. The catalyst for today's selling was the report that the U.S. service industry fell to recessionary levels during January. That industry accounts for 90% of the U.S. economy. While economists are starting to jump on the recessionary bandwagon (despite today's media report that the weak economic numbers were "unexpected"), we have to point out that the markets have been pointing to a likely recession for several months. It seems that at every major market turn, Wall Street has to learn the same lesson over and over again. That lesson is that markets lead the economy, not the other way around. That's why we base our decision on market charts, because the markets are the best leading economic indicators of all.

Chart 5