CHINA AND INDIA ARE WORST GLOBAL PERFORMERS IN 2008 -- THE TWO STRONGEST ARE BRAZIL AND CANADA -- A LOT OF METAL AND OIL SERVICE STOCKS ARE BREAKING OUT TO THE UPSIDE
CHINA AND INDIA FALL TO BOTTOM OF 2008 RANKINGS... A year ago it was believed that the raging bull markets in China and India would go on forever. Three months ago while in Europe, I read that those huge emerging markets would be the safest bets in a global downturn. Both of those views proved to be wrong. The performance bars in Chart 1 show how the world's biggest markets have done since the start of 2008. China and India have been the two worst performers with losses of -34% and -21% respectively. Five of the other major markets (Germany, France, Japan, Australia, and Britain) all fell more than the S&P 500. So much for the notion of "global decoupling". The only country in the black for 2008 is Brazil (far left). Although Canada is down 1.9% for the year, it has done better than the S&P 500 which is down -7.3%. The two countries showing the best global performance during the first quarter have something in common. They're both commodity producers.
Chart 1
CHINA LOSES LEADERSHIP ROLE... Nothing lasts forever. Not even Chinese global leadership. Chart 2 shows the Shanghai Stock Exchange Composite Index (SSEC) plunging more than 40% from its October peak. That's twice as bad as the drop in most other global stocks during the same period of time. The relative strength ratio below Chart 2 (measured against the Dow Jones World Stock Index) peaked in January and completed a "double top" formation during the first quarter. Volatility is a double-edge sword. It works for a market like China on the upside, but against it on the downside. In other words, global markets that rise the fastest during an uptrend often fall the hardest in a downtrend. The selloff may, however, be overdone. The RSI line in Chart 2 shows the SSEC in an oversold condition. The monthly bars in Chart 3 show that the Chinese market has lost a little more than half of its gains from the previous two years (in only five months). Those two factors combined may help to stabilize the Chinese market over the short-run. The moving average trends in Chart 2, however, are still down. That makes it doubtful that China will regain its leadership role anytime soon.
Chart 2
Chart 3
BRAZIL AND CANADA ARE WORLD LEADERS ... One thing that hasn't changed over the last year has been global leadership coming from Brazil. Chart 4 shows that the Brazilian Bovespa Stock Index (plotted through yesterday) has essentially traded sideways since last October while the rest of the world tumbled. That global relative strength is reflected in the rising BVSP/Dow Jones World Stock Index ratio below Chart 4. The BVSP is moving up to challenge its old high. Canada is another world leader. Chart 5 shows the Toronto Stock Index trading over its 200-day moving average today. Its relative strength ratio (below chart) has been climbing since the start of the year. One thing both of those markets have in common is that they're big commodity producers. That may seem strange given the recent selloff in commodity markets. However, we see the same type of leadership coming from U.S. stocks tied to commodities. That suggests that global investors still have a bullish long-term view on commodity markets.
Chart 4
Chart 5
MATERIALS SPDR IS BREAKING OUT ... Throughout the market problems of the first quarter, stocks tied to basic materials have been the top performing sector. That's also been true over the last week. Chart 6 shows the Materials SPDR (XLB) trading over 43 today for the first time this year. That puts in in striking distance of its fourth quarter highs. The rising relative strength line below Chart 6 shows the group's superior performance since last autumn. Three of the top performing stocks in the XLB are Alcoa, Freeport McMoran Copper & Gold, and U.S Steel.
Chart 6
INDUSTRIAL METAL BREAKOUTS... Three of the top performing material stocks are tied to industrial metals. The strongest is US Steel which just recently broke out to a new record high (Chart 7). Right behind it is Freeport McMoran Copper & Gold (which is tied more to copper than gold). Chart 8 shows FCX breaking through a "neckline" drawn over its December/February highs. Its relative strength ratio is near a new high as well. Chart 9 shows Alcoa moving up to challenge overhead resistance near 40. A decisive close over that chart barrier would be a bullish breakout for the big aluminum stock. Its relative strength ratio turned up sharply in January. Industrial metals were the strongest acting commodities during the first quarter. Energy came in second. That may explain why energy stocks continue as market leaders.
Chart 7
Chart 8
Chart 9
MORE ENERGY BREAKOUTS... Chart 10 shows the AMEX Natural Gas Index touching a record high today. I've written a number of bullish stories on natural gas stocks of late. Most of today's energy buying, however, is coming more from oil service stocks. Chart 11 shows Oil Service Holders breaking out to a new three-month high. Its relative strrength line is breaking out as well. A number of individual oil service stocks are also breaking out to the upside.
Chart 10
Chart 11
OIL SERVICE LEADERS... One of the top performers in the Oil Services Holders is Rowan Companies. Chart 12 shows the stock breaking out to the highest level since last July. Its relative strength ratio is doing the same. Chart 13 shows Ensco Intl already nearing a test of last summer's highs. Its relative strength ratio is in a strong uptrend. The strongest chart of all may belong to Halliburton. Chart 14 shows that oil service leader nearing a challenge of its 2006 and 2007 highs in what appears to be a two-year "ascending triangle". [An ascending triangle is defined by two converging trendlines with a flat upper line and rising lower line. It's a bullish pattern]. A number of readers have asked where to start putting new money to work in the stock market. At the moment, two good choices seem to be basic material and energy stocks.
Chart 12
Chart 13
Chart 14
