STOCKS AND DOLLAR CONTINUE INVERSE CORRELATION - CHINA LEADS LOWER WITH BREAKDOWN - GLOBAL INDICES HIT HARD - COMMODITIES AFFECTED BY DOLLAR AND STOCKS - NATURAL GAS FORMS FALLING FLAG
STOCKS AND THE DOLLAR CONTINUE INVERSE CORRELATION... Link for todays video. Maybe this time its different, but the sharp rise in the Dollar could be a big negative for the stock market. The Dollar and the stock market have had an inverse relationship for most of the last two years. Stocks fall as the Dollar rises and vice versa. Chart 1 shows the S&P 500 with the US Dollar Index. These two price plots are virtual mirror images, which confirms the inverse relationship. Correlation is not the same as causation, but there is clearly some sort of relationship at work here. In Thursdays Market Message, John Murphy noted strength in the Dollar and Yen as investors sought safe haven. This could be at work now. The yellow areas show two periods when the Dollar surged higher. The first is from mid July 2008 to mid September and the second is from December to present. The first surge in the Dollar preceded a sharp decline in the S&P 500 from September to November 2008. Despite holding up well during the December Dollar surge, the S&P 500 fell apart during the Dollar surge over the last three weeks. As Yogi might say, its like Dj vu all over again.
Chart 1
CHINA LEADING LOWER AND BREAKING DOWN... The Shanghai Composite ($SSEC) showed relative strength ahead of the S&P 500 bottom in March and showed relative weakness ahead of the S&P 500 top in January. While the significance of the January top remains to be seen, it seems the performance of Chinese stocks is important to US performance. Chart 2 shows the Shanghai Composite in red with the S&P 500 in black. First, notice that Shanghai bottomed well ahead of the S&P 500, early November 2008 versus early March 2009. Second, notice that Shanghai peaked well ahead of the S&P 500, early July versus mid January. Performance is confirmed with the price relative ($SSEC:$SPX ratio) in the indicator window. The price relative bottomed in September 2008 as Shanghai started showing relative strength and topped in July 2009 as Shaghai started showing relative weakness. Behind the US and Japan, China is the worlds third largest economy. Perhaps China even surpassed Japan in 2009. It is going to happen sometime. Based on such a big, and growing economy, we would do well to watch the Shanghai Composite for clues on global equity health. Chart 3 shows weekly candlesticks over the last 2 1/2 years. The Shanghai Index hit resistance near the 38% retracement in July, formed a lower high in November and broke the trendline in January.
Chart 2
Chart 3
NOWHERE TO HIDE... The last three weeks have truly rattled global equities and commodities. In fact, there are few, if any, country equity indices that are up over the last three weeks. Asia, Europe, the US and South America were all rattled. Chart 4 shows the Australian All Ords Index ($AORD) with a failed triangle breakout and a plunge to support over the last few weeks. Chart 5 shows the German Dax ($DAX) hitting a new high above 6000 and then plunging around 9% the last four weeks. Based on the Fibonacci Retracements Tool and broken resistance turning support, this decline could extend to the 5100-5200 area. Chart 6 shows the FTSE (pronounced foot-see) tumbling over 7% from its recent high. London was able to shake off the Dubai debacle in late November, but the market obviously sees something worse now. A 50-62% retracement of the July-January advance would extend to the 4700-4800 area. Chart 7 shows the Brazilian Bovespa ($BVSP) declining around 10% from its early January high. A 50-62% retracement of the July-January advance would extend to the 58,000-60,000 area. Before looking at these charts, note the interconnected-ness of these markets. All rose from July to January and all fell over the last three weeks.
Chart 4
Chart 5
Chart 6
Chart 7
COMMODITIES WEIGHED DOWN BY DOLLAR AND STOCKS... In addition to stock markets around the world, we have seen a rout in various commodity groups. Strength in the Dollar is partly to blame for weakness in commodities. In addition, weakness in global equities bodes ill for the global economy. A downturn in global equities would imply a future downturn in the global economy that would dampen demand for commodities. John Murphy showed the DB Commodity Index Tracking ETF (DBC) breaking below its 200-day moving average on Thursday. PerfChart 8 shows six commodity related ETFs with the S&P 500 ETF (SPY) and the DB Dollar Bullish ETF (UUP). Of these eight securities, only the DB Dollar Bullish ETF (UUP) is up over the last four weeks. The DB Base Metals ETF (DBB) and the Silver ETF (SLV) are pacing the declines with losses in excess of 15%. Silver is an industrial metal so the relationship here makes sense. The US Oil Fund ETF (USO) is also down double digits.
Chart 8
NATURAL GAS FORMS FALLING FLAG... When scrolling through the commodity ETF charts, the US Natural Gas Fund (UNG) caught my eye with a potentially bullish flag. Before getting into the chart, it should be noted that this is an ETF based on a basket of natural gas futures contracts. It does not perfectly track natural gas. It would be prudent to analyze the price charts for the actual futures as well. These can be found at barchart.com and ino.com. Come back to Stockcharts.com for your equity charts! I did check out the March 2010 natural gas futures contract and the price chart looks similar to UNG. Chart 9 shows UNG with a potential support zone in the 8.5-9.5 area. The ETF bounce off this zone in September and November-December. With another decline in January, UNG is once again testing support here. A break above falling flag resistance would call for a successful support test and a continuation of the December advance. Next resistance resides around 12.
Chart 9
