THE DOLLAR AND YEN CONTINUE TO GAIN GROUND WHICH IS KEEPING GLOBAL STOCKS AND COMMODITIES UNDER PRESSURE -- THE RISING YEN, HOWEVER, DOESN'T HELP JAPANESE STOCKS

FLIGHT TO DOLLAR AND YEN ... I wrote yesterday that this week's rebound in the US Dollar Index and the Japanese Yen were negative signs for commodities and stocks. Charts 1 and 2 show the Dollar and the yen rising again today. The rising dollar is keeping downward pressure on gold and other commodities, while the rising yen is a negative sign for global stocks. Outside of the yen, all other major foreign currencies lost ground today along with their respective stock markets.

Chart 1

Chart 2

RISING YEN HURTS JAPANESE STOCKS ... While it's true that falling foreign currencies signal weakness in their respective economies and stock markets, it doesn't follow that a rising yen is good for Japanese stocks. In fact, the opposite is true. Chart 6 compares the Nikkei 225 Index (price bars) to the yen over the last four years. The chart shows that a rising yen since mid-2007 has coincided with falling Japanese shares. The reason is that Japan's economy is heavily dependent on exports which are hurt by a rising yen. No doubt, Japanese authorities are unhappy about the surging yen. There have been rumors of central bank intervention to slow its rise. Whether or not that happens, the rising yen is a negative sign for global equity markets, which includes Japan. In my view, it shows that the unwinding of the yen carry trade is still going on.

Chart 3

LINKAGE BETWEEN FOREIGN STOCKS AND CURRENCIES... Charts 4 through 7 show linkage between four foreign currencies and their respective country stock ETFs. Chart 4 shows the Euro (daily bars) weakening along with Germany iShares (solid line). The same is true for the British Pound and and British iShares (Chart 5), the Canadian Dollar and Canadian iShares (Chart 6), and the Australian Dollar and Australian iShares (Chart 7). The two latter markets get hit twice since they're commodity producers. Commodity prices usually fall along with most foreign currencies as the dollar rises. [Since foreign ETFs are priced in dollars, they fall faster than their cash markets when the dollar is rallying].

Chart 4

Chart 5

Chart 6

Chart 7

FOREIGN ETFS BREAK 50-DAY LINES ... The chart patterns for most foreign stock markets are similar to those in the U.S. On Monday, all of the major U.S. stock indexes fell back below their 50-day averages. Chart 8 shows EAFE iShares doing the same today. Chinese iShares had been among the strongest during the recent bounce. Chart 9, however, shows Chinese iShares falling back below their 50-day average as well.

Chart 8

Chart 9

S&P IS TESTING LATE DECEMBER LOW ... I wrote last Friday that a close below the late December intra-day low at 857 for the S&P 500 would be a negative sign for the market. The S&P came within five points of touching that earlier trough today before closing modestly higher. So the testing process goes on. Even with today's modest uptick, the onus is now on the bulls to keep the recent slide from getting more serious.

Chart 10