DOLLAR REBOUND CONTINUES AS EURO BREAKS CHART SUPPORT -- US BOND YIELDS JUMP -- RISING DOLLAR THREATENS EMERGING MARKET LEADERSHIP -- S&P 500 MEETS LONG-TERM RESISTANCE NEAR 1120

DOLLAR INDEX BOUNCES OFF 2008 LOW ... The rebound in the dollar that started a couple of weeks ago is continuing. And the rally is coming off a prominent support level. Chart 1 shows the PowerShares Dollar Bullish ETF (UUP) bouncing off its early 2008 low near 22. Bounces off support levels usually have more staying power. In addition, the 14-day RSI line (below chart) has risen to the highest level since March. That suggests a change in the dollar's short-term trend from down to up. Another positive dollar sign is the fact that the Euro has fallen below initial chart support.

Chart 1

EURO BREAKS NOVEMBER LOW... Last Tuesday I showed the Euro falling below its 50-day average, and suggested that a close below its November low near 146 would signal a more serious downturn. Chart 2 shows that the November low as been broken in decisive fashion. The weekly bars in Chart 3 suggest that the Euro's "intermediate" trend may be rolling over as well. It shows the Euro having closed below its 10-week average for the first time since last March. Its 14-week RSI line (top of chart) has turned down from overbought territory over 70. In addition, the weekly MACD lines (below chart) have turned negative for the first time since last December. Euro weakness means dollar strength. Keep in mind that most of the commodity and stock rally since March has been built largely on Euro strength and dollar weakness. The dollar rally has already caused profit-taking in commodity markets. The bigger question is whether a stronger dollar will also stall the global stock market rally. One of the factors driving the dollar higher (and Euro lower) is stronger economic news in the U.S. (combined with a weaker Europe) and today's big jump in the November PPI number. That's been pushing U.S. interest rates higher, which is also dollar-friendly.

Chart 2

Chart 3

BOND YIELDS TURN UP ... Interest rates in the U.S. jumped again today. The most notable upmove is seen the 10-Year Treasury Note Yield (TNX) in Chart 4. The chart shows the TNX moving above its autumn high. It is also breaking a down trendline drawn over its June/August highs. While rising bond yields are usually a sign of a stronger economy, there's a negative warning for the financial markets. The global stock rally since March has been built on cheap money (low interest rates). Any sign that global rates are turning up could threaten that uptrend. Another factor fueling the global rally has been the "dollar carry trade" where global traders borrowed cheap dollars (at low rates) and re-invested in higher yielding assets elsewhere. Rising U.S. rates threatens that trade. So does the higher dollar.

Chart 4

RISING DOLLAR THREATENS FOREIGN LEADERSHIP... Another side effect of a rising dollar could be loss of leadership from foreign stocks, especially emerging markets (many of which like Brazil and Russia have benefited from rising commodity prices). That weakening trend is already showing up beneath the surface. Chart 5 shows the relative strength ratios of Emerging Market iShares (blue line) and EAFE iShares (red line) compared to the S&P 500 (flat black line). Their ratios turned up in March as the dollar started dropping. That's because a falling dollar makes foreign stocks more attractive. Emerging markets (blue line) have outperformed the S&P 500 by 25% since April and have paced the global rebound. Foreign developed markets represented by EAFE iShares (red line) have outperformed the S&P 500 by 10%. The EAFA ratio peaked in October and is now dropping. The EEM ratio also peaked in October and is started to soften as well (although not as much). Last Tuesday, I showed the BRIC ETF (EEB) having recovered 62% of its bear market and suggested that it looked ripe for profit-taking. A rising dollar might be the catalyst that causes some profit-taking in emerging markets and foreign stocks in general. Any serious profiit-taking in those foreign leaders could have a negative influence on U.S. stocks.

Chart 5

SHORT-TERM TREND PICTURE ... The next three charts show the "short-term" trend picture for the EEM, the EFA, and the S&P 500. Although no significant downturns have taken place, it's worth noting that the EFA has already slipped beneath its 50-day average (Chart 6). Chart 7 shows the EEM trading below its recent highs above 42. Those two foreign ETFs have been slightly weaker than the S&P 500 which is running into some selling near 1120 (Chart 8). I suspect part of the reason why the S&P 500 is having trouble near 1120 is because it's testing a two-year down trendline (as shown in Chart 9). That also represents a 50% retracement of the 2007/2009 bear market. A rising dollar, along with some profit-taking in foreign shares, make that major resistance barrier even more important. So far, all we can say is that the global rally has stalled a bit and is in a short-term trading range. A drop below their late-November lows, however, would be a sign that more serious profit-taking has set in.

Chart 6

Chart 7

Chart 8

Chart 9