FALLING MATERIAL STOCKS HELP PULL NYSE COMPOSITE INDEX BELOW 50-DAY AVERAGE -- EAFE ISHARES VIOLATE 200-DAY LINE -- WEAKNESS IN CHINA STOCKS ARE ALSO WEIGHING ON COPPER -- TREASURY BOND PRICES ACHIEVE BULLISH BREAKOUT

NYSE INDEX BREAKS 50-DAY LINE -- MATERIALS TUMBLE... Last Tuesday, I showed the NYSE Composite Index testing its January high and its 50-day average, and suggested that it needed to stay above both lines to maintain its spring uptrend. Chart 1 shows the NYA falling below both support lines today. Its 14-day RSI line (above chart) has fallen below the 50 level for the first since mid-January (gray circles) which raises the odds for a deeper correction. In addition, its daily MACD lines (below chart) have turned negative for the first time in three months. The NYA is the first major US stock index to break its 50-day line. Part of the reason can be seen in Chart 2. The NYSE Index is heavily influenced by material stocks which are also breaking their blue support line today. The XLB/SPX also shows that material stocks have been market laggards throughout 2010. It's also noteworthy that the XLB failed to clear its January peak which set up a "negative divergence" with the NYA. That isn't the only negative divergence that I'm concerned about.

Chart 1

Chart 2

EFA ISHARES BREAK 200-DAY LINE ... Last Tuesday, I also warned about the potential negative divergence developing between EAFE iShares and the U.S. market which was reflected by the failure of the EFA to exceed its January high (Chart 3). Unfortunately, that divergence turned even worse today with the EFA falling back below its 200-day moving. The EFA/SPX relative strength ratio (below chart) has been falling throughout the early part of 2010. Some of that is due to the rising U.S. Dollar (and falling Euro). [Foreign shares usually underperform the U.S. when the dollar is rising. That's especially true of foreign ETFs which are quoted in dollars]. That being said, any serious divergence between US and foreign shares is a potential warning. While most of the foreign weakness is coming from Europe, Chinese shares have become market laggards. Chart 4 shows the April upturn in China iShares falling well short of its fourth quarter high. The FXI has since fallen back below its 200-day moving average. The FXI:EEM ratio (below Chart 4) shows that China has been the weakest of the large emerging markets. The inability of China to rally further during April (and its subsequent downturn) may also help explain why material stocks tied to commodities have come under renewed selling pressure. China is the world's biggest importer of industrial commodities like copper. News that China is raising bank reserves for the third time, while manufacturing is slowing, may account the for steep plunge in the price of copper (Chart 5).

Chart 3

Chart 4

Chart 5

TREASURIES SURGE... As usually happens when stocks fall sharply, Treasury bond prices rally. Not only are they rallying, but they're also achieving bullish breakouts. Chart 6 shows the 7-10 Year T-Bond iShares (IEF) surging to a new 2010 high. Chart 7 shows the 20+Year T-bond ETF (TLT) reversing a downtrend that existed since last October. [I warned in a recent message that rising Treasury bond prices could be signaling a stock market correction. That now appears to be the case].

Chart 6

Chart 7

VIX CONTINUES TO SURGE ... Today's message is almost a rewind of last Tuesday's which described how the downgrade of Greek debt to junk was causing profit-taking in stocks and buying of US bonds, and the fact that Europe was pulling EAFE ishares lower. The headline also described how the "20% Jump in the VIX Shows That Option Traders Are Turning More Cautious on Stocks". The rally in the VIX has gotten even stronger. Chart 8 shows the VIX rallying more than 20% today and trading above its (red) 200-day average by the widest margin in a year. Although the VIX is still below its January high, its current percentage gain has already matched its January gain. A rising VIX is usually associated with falling stock prices, and increases the odds for a deeper stock correction. Last Tuesday's intermarket moves were just a warning of a possible market correction. That warning appears to have gotten a lot stronger this week.

Chart 8