DOW AND NASDAQ CROSS BACK OVER 200-DAY LINES -- THAT INCREASES ODDS FOR SUMMER RALLY -- EMERGING MARKETS ARE LEADING RALLY -- % NYSE STOCKS TRADING OVER 200-DAY AVERAGE TURNS UP
EMERGING MARKETS LEAD STOCK RALLY... A couple of months ago we were concerned that foreign stocks (and emerging markets in particular) were leading the U.S. stock market lower. That trend has reversed. Emerging markets are now leading us higher. Chart 1 shows Emerging Market iShares having already exceeded its June high. The EEM:SPX relative strength ratio (below chart) shows global leadership coming from emerging markets. One of the reasons for new leadership in foreign stocks may be the decline in the U.S. Dollar (green line below Chart 1). The rising dollar during the first half of the year made U.S. stocks more attractive. The falling dollar since the start of June has swung the pendulum in favor of foreign stocks. Another positive sign for global stocks is new strength in China. Chart 2 show China iShares (FXI) climbing over their 200-day line and nearing a test of the June high. The RS line below the chart shows that China is now doing better than the U.S. That's also good for ommodities (like copper and oil) that are closely tied to China. Chart 3 shows copper trading at a three-month high and challenging its 200-day line. The peak in the U.S. Dollar in early June is also helping copper and basic material stocks which were the week's strongest sector.
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Chart 1
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Chart 2
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Chart 3
NASDAQ CLEARS 200-DAY LINE... The Dow and the Nasdaq closed above their 200-day moving averages on Friday which is a definite turn for the better. I'm focusing on the Nasdaq today because it usually acts as a leading indicator for the rest of the market. The daily bars in Chart 4 show the short-term improvement in the Nasdaq trend. Friday's gain pushed the Nasdaq Composite above its July high, its 200-day average, and its April/June down trendline (not shown). And it did so on rising volume (although the rest of volume rose on lighter volume). The Nasdaq/S&P 500 ratio has also turned up. Nasdaq leadership is usually a good sign for the rest of the market. Daily RSI and MACD lines are also positive. Friday's upturn paves the way for a further rally to its mid-June peak. What happens from there will help determine if this is just summer bounce or something more lasting. There are some factors which should temper bullish enthusiasm. First of all, 50-day averages remain below 200-day averages in all major market indexes. That needs to be corrected. Second, the weekly bars in Chart 5 show weekly MACD lines still in negative alignment. That needs to be corrected as well. Lastly, other major stock indexes (like the S&P 500 and the NYSE Composite Index) still need to clear their 200-day lines. Keep in mind as well that summer bounces are usually concentrated in the month of July. Seasonal trends then turn more negative into the autumn. So even though the short-term stock picture has improved, the longer-term trend is still in doubt.
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Chart 4
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Chart 5
% STOCKS ABOVE 200MA IMPROVES AS WELL ... Another sign of short-term market improvement can be seen in the percent of NYSE stocks that are trading above their 200-day averages (NYA200R). What happens to that line often tells us more about the broader market than the major stock indexes (which are dominated by large cap stocks). The lower peak by the line this spring (and its downturn during May) gave an early warning of stock weakness (see arrow). The good news is that the line has just turned up from oversold territory near 30. Normally, the line has to climb back above 60 to give a more bullish reading. That would only happen when the major of NYSE stocks are back above their 200-day averages and out of immediate danger.
