LOW VIX AND CPC ARE NEGATIVE FOR STOCKS -- FOREIGN MARKETS ARE FALLING FASTER THAN THE US BECAUSE OF A STRONGER DOLLAR -- FOREIGN COMMODITY EXPORTERS ARE THE LAST TO PEAK IN A GLOBAL SLOWDOWN

A RISING VIX IS USUALLY BAD FOR STOCKS ... On Friday August 29, I wrote a Message about the CBOE Volatility (VIX) and the CBOE Put/Call Ratio (CPC) being too low to support a market rally. As far as I can see, that situation hasn't changed. Chart 1 shows the price bars for the VIX over the last eight months. The solid line on top is the S&P 500. The two generally trend in opposite directions which they've been doing all year. As I explained in the earlier message, market rallies usually take place when the VIX is turning down from much higher levels. The market's last two bounces from March to May and the most recent one between July and August started with VIX peaks over 30. Chart 1 shows the August VIX bottom turning up from above its May low and starting to climb again. A rising VIX from lower levels usually coincides with falling stock prices. We see the same picture with the put/call ratio.

Chart 1

CBOE PUT/CALL RATIO TOO LOW TO SUPPORT MARKET RALLY ... The CBOE Put/Call Ratio (CPC) is a contrary indicator. As such, it also trends in the opposite direction of the market. The red line in Chart 2 is a 5-day average of the CPC (which helps smooth out its trend). The green line is the S&P 500 over the last year. The chart shows that S&P bounces in November, March, and July coincided with peaks in the CPC. S&P downturns in October, December, and May coincided with CPC troughs. At the moment, the CPC is starting to turn up from a relatively low level. That appears to be more bearish than bullish. The negative position in the CPC and the VIX helps explain why Monday's market rally didn't show show any follow-through today.

Chart 2

RISING DOLLAR PUNISHES FOREIGN STOCK ETFS ... I've also suggested in past messages that a major bottom in the U.S. stock market is unlikely without a corresponding bottom in foreign stocks. Charts 3 and 4 show no sign of that happening. Both the EAFE iShares (Chart 3) and the MSCI Emerging Market iShares (Chart 4) are still in clear downtrends. With both ETFs falling again today, yesterday's bounce looks like nothing more than a short-term blip. The blue lines below Charts 3 and 4 are relative strength ratios showing that foreign stocks have fallen harder than U.S. stocks since July. That's largely due to the upturn in the U.S. Dollar Index (green lines). That hurts foreign stocks in two ways. For one thing, it removes the tailwinds that foreign stocks have gotten since 2003 from a falling dollar. Secondly, foreign ETFs are priced in U.S. Dollars. When the dollar is rising (as it is now), foreign ETFs fall faster than their actual benchmarks (priced in local currencies). While the EFA and the EEM exaggerate the decline in foreign markets, they represent what a foreign portfolio actually looks like to an American investor.

Chart 3

Chart 4

COMMODITY EXPORTERS ARE HIT EVEN HARDER ... Foreign stocks that have been hit especially hard since July are commodity exporters like Brazil and Russia. Those countries are getting hurt by both a rising dollar and falling commodities. Chart 5 shows that the downturn in the CRB Index (price bars) coincided exactly with the upturn in the US Dollar Index (green line) during July. The relative strength lines below Chart 5 show that Brazil iShares (EWZ) and the Russian ETF (RSX) started falling faster than the rest of the world in July as well. Another commodity producer that's starting to lose ground is Canada.

Chart 5

CANADIAN MARKET IS ALSO WEAKENING ... Canada has also been hurt by falling commodity prices. Chart 6 shows the Toronto Index (TSE) bearing down on its January low. The TSE/SPX ratio (below chart 6) shows Canada starting to underperform the US during July as the CRB Index (orange line) peaked. That shows that falling commodities have worked against Canadian stocks. Chart 7 shows Canadian iShares (EWC) also bearing down on its 2008 lows after forming a big "double top" reversal pattern between November and June. The EWC/TSE ratio (below Chart 7) shows that the EWC has underperformed the TSE since last November. The reason for that is the falling Canadian Dollar (green line). Notice the close correlation between the two lower lines in Chart 7. That's because the entity priced in the stronger U.S. currency (Canadian iShares) falls faster than the entity priced in the weaker Canadian currency. The weaker EWC represents the truer picture for American investors who lose on the stock side and the currency side. That's another example of why a rising U.S. Dollar (and falling commodities) puts a double hurt on foreign commodity exporters. Commodities, which peaked during July, are usually the last asset class to turn down entering a recession. Foreign commodity producers are also usually the last stock markets to peak in a global downturn. One of the main catalysts for both trends is a stronger U.S. Dollar and falling foreign currencies. Unfortunately, that's due more to foreign weakness than U.S. strength.

Chart 6

Chart 7

FALLING CURRENCIES TUMBLE ... The U.S. Dollar isn't rising because of U.S. strength. It's rising because foreign currencies around the world are tumbling. That's a sign of global weakness as foreign economies start to follow their respective stock markets lower. The charts show freefalls in the British Pound (Chart 8), the Euro (Chart 9), and the Australian Dollar (Chart 10). The only foreign currency that isn't tumbling is the Japanese yen. Unfortunately, that's not a good sign either.

Chart 8

Chart 9

Chart 10

CARRY TRADE CONTINUES TO UNWIND ... One of our weekend contributors showed the Japanese yen rising against the Euro to demonstrate that the unwinding of the "yen carry trade" is still going on. Charts 11 and 12 show the yen soaring against the British Pound and the Australian Dollar. You may recall us writing last summer about how global traders had been borrowing yen at low interest rates and converting it into higher-yielding assets around the world. The cheap yen helped support the global bull market in stocks. Last summer, however, the yen started to strengthen against higher-yielding currencies as traders were forced to cover yen shorts and sell other assets. That happened as global stocks were peaking (see Chart 11). That trend is still continuing.

Chart 11

Chart 12