GLOBAL STOCK AND COMMODITY CORRECTION MAY BE STARTING AS DEFENSIVE MONEY FLOWS BACK INTO THE DOLLAR AND TREASURY BONDS

STOCK DROP STARTS IN ASIA... A 5% drop in China's Shanghai Stock Index started a global selling spree that has spread to the U.S. Chart 1 shows China iShares (FXI) gapping down 4.4% and undercutting its 50-day average. Chart 2 shows EAFE iShares (EFA) falling more than 3% and undercutting its August low. Both the RSI and MACD lines in Chart 2 show the short-term trend of the EFA turning negative from overbought territory. Most stock indexes in the U.S. have lost more than 2%. Commodities are falling along with stocks (Chart 3) as are stocks tied to commodities like basic materials, energy, and gold. Part of the commodity drop is tied to a strong rally in the U.S. Dollar which is attracting safe haven money (as is the Japanese yen). Treasury bonds are also rallying sharply (Chart 4). The only group in the black is healthcare, which is attractive defensive money. I strongly suspect that global stocks are starting a downside correction that could last into the autumn. The fact that the downturn is starting from overhead resistance levels (1000 in the S&P 500 and 4000 in the QQQQ) adds to that negative short-term view. I'll have a more in-depth analysis of those two stock indexes later in the day. In the meantime, it's time for some short-term profit-taking in stocks and commodities or some other defensive action to protect recent profits.

Chart 1

Chart 2

Chart 3

Chart 4