CHINA LEADS GLOBAL BOUNCE -- FALLING DOLLAR BOOSTS FOREIGN ETFS -- BRAZIL IS GETTING A LIFT FROM STRONGER COMMODITIES -- S&P 500 FAILS ANOTHER TRY AT ITS 50-DAY AVERAGE -- FINANCIALS AND TRANSPORTS ARE AMONG BIGGEST LOSERS
CHINA LEADS GLOBAL BOUNCE ... One of our readers asked recently if China was starting to show any new signs of relative strength. After this week's upturn, the answer is yes. With so many markets rallying up to test their 50-day averages, China iShares (FXI) have cleared that resistance barrier in decisive fashion as shown in Chart 1. New signs of relative strength in China is seen by the ratio of the FXI to the Dow Jones World Index (DJW) below the chart. China's RS line has been rising since late October. The weekly bars in Chart 2 put China's recent rally into better perspective. From last October to this October, China iShares lost 70% and were one of the world's weakest performers. That can be seen by the falling FXI/DJW ratio in Chart 2. The weekly RS line has now broken that yearlong down trendline. That's a good sign for China. Another encouraging sign for the FXI is the recent upturn in its 14-week RSI (above Chart 2) which has turned up from oversold territory below 30. The FXI has a long way to go, however, to reverse its major downtrend. Chart 2 shows long-term resistance in the 35-40 region. China isn't the only foreign ETF that's been showing better relative strength of late.
Chart 1
Chart 2
EFA ISHARES BENEFIT FROM FALLING DOLLAR... EAFE Index iShares (EFA) are also starting to show more relative strength than U.S. stocks. The daily bars in Chart 3 show the EFA testing its 50-day average. The line just below Chart 2 is the EFA/S&P 500 ratio which has been rising since late October and is trading at a two-month high. A big part of the reason for the superior performance of the EFA is the weaker dollar which is the bottom line in Chart 3. A firmer dollar favors the U.S. market. A falling dollar favors foreign ETFs. Chart 3 shows that the recent upturn in the EFA/SPX ratio coincides with dollar weakness. Chart 4 shows the trends over the last year. It shows the downturn in the EFA/SPX ratio starting in midyear just as the dollar started to rally. The area in the circle shows that trend may be reversing (at least over the short run).
Chart 3
Chart 4
COMMODITY BOUNCE BOOSTS BRAZIL ... Another foreign ETF that's showing better relative performance is Brazil. Chart 4 shows Brazil iShares (EWZ) trading over its 50-day average before succumbing to some late selling today. The EWZ/SPX ratio (below Chart 5) is starting to stabilize. The reason for Brazil's stronger performance is twofold. One is falling U.S. dollar. The other is stronger commodities resulting from the weaker dollar. Although most commodities have bounced this week, gold has been the strongest. The bottom line in Chart 5 shows a positive correlation between the EWZ/SPX ratio and the price of gold. Since Brazil is a big commodity exporter, it benefits from commodity buying.
Chart 5
EFA IS IN MAJOR OVERSOLD TERRITORY ... On Tuesday, I showed that the monthly RSI for the S&P 500 was in major oversold territory below 30. That's also the case with foreign stocks. The 14-month RSI below Chart 7 is in the most oversold condition since the start of 2003. The 14-week RSI line overlaid on the weekly EFA price bars in Chart 7 is just starting to rise from oversold territory. That tells me that global stocks have fallen too far too fast and are trying to regain some of that lost ground. That's not enough to signal a major bottom. But it does explain why global stocks are rallying in the face of bad economic news. Its also worth noting that the EFA ishares have lost approximately half of their value over the last year (falling from 80 to 40). The S&P 500 has also lost half of its value. That's a normal spot for some attempt at stabilization to take place.
Chart 6
Chart 7
S&P 500 BACKS OFF FROM ITS 50-DAY AVERAGE... The S&P 500 (and other major market indexes) have been unable to break through their 50-day moving average lines. Chart 8 shows the S&P 500 losing nearly 3% today in another failed attempt to rise above that initial resistance barrier. Part of the reason may lie with the daily stochastic lines at the bottom of Chart 8 which have reached overbought territory over 80. The last two times they got that high was in early November and early August. The market weakened in both cases. The 14-day RSI line remains stalled at its 50 line. Short-term market bounces often stall at the RSI 50 level. Today's biggest culprits on the downside were financials, consumer disretionary stocks (led lower by General Motors), transports, and small caps. Charts 9 through 12 show all of those markets falling short of their 50-day lines. That's a lot of selling for the market to overcome, especially at an important resistance point and in a short-term overbought condition.
Chart 8
Chart 9
Chart 10
Chart 11
Chart 12
