FOREIGN SHARES HAVE ALREADY EXCEEDED SUMMER HIGHS AND ARE PULLING US STOCKS HIGHER -- EMERGING MARKETS ARE EVEN STRONGER LED BY INDIA, BRAZIL, AND CHINA -- AUSSIE DOLLAR HITS 52-WEEK HIGH -- NASDAQ 100 CLEARS AUGUST HIGH
FOREIGN STOCKS LEAD US HIGHER... One of the reasons I've turned more bullish on the U.S. stock market is the relatively strong performance in foreign shares. Look at Chart 1 which compares EAFE Index iShares (red line) to the S&P 500 (green line) over the last year. During the spring, relative weakness in foreign shares weighed on the U.S. market and helped pull it lower. That situation is now reversed. The EFA is rising much faster than the S&P 500 and has already exceeded its August high. Chart 2 shows Emerging Market iShares (red line) already challenging its April high. The rising EEM/SPX ratio (below Chart 2) shows emerging markets pulling the U.S. higher. That suggests that U.S. stocks should start playing catch-up with foreign stocks.
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Chart 1
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Chart 2
INDIA AND BRAZIL LEAD EMERGING MARKETS HIGHER... Two of the best performing emerging markets are India and Brazil. Chart 3 shows the India ETN (INP) hitting a new 52-week high. Chart 4 shows Brazil iShares having cleared its 2010 down trendline. Chart 5 shows China iShares close to doing the same. Brazil and China are closely tied to the fortunes of commodity markets (Brazil being a commodity exporter and China a commodity importer). Their stock strength also carries a bullish message for most commodity markets that are economically-sensitive (like oil, copper, and silver). That also explains the recent strength in commodity currencies like the Canadian and Aussie Dollars. Chart 6 shows the Aussie Dollar reaching a new 52-week high. Strength in most foreign currencies suggests a weaker dollar which is normally bullish for most commodities. Stronger foreign currencies also hint at more confidence in the global economy and should benefit foreign shares. Although foreign stocks may continue to outperform the US (especially if the U.S. Dollar starts to weaken again), they should help pull the U.S. market higher.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
NASDAQ 100 CLEARS AUGUST HIGH... It's normally a good sign for the market when it's being led higher by large technology shares. That's why the ability of the Nasdaq 100 in Chart 7 to clear its August high (and neckline) is encouraging. Chart 8 shows the Nasdaq Composite Index not far behind. The COMPQ is right up against its August intra-day high at 2309. Upside volume has also started to pick up this week which is another positive. So is the uptick in the Nasdaq/SPX ratio (bottom of Chart 9). That increases the odds for an eventual upside breakout in the rest of the market. A close over August highs by most major stock indexes on rising volume would complete a bullish "head and shoulders" pattern and should pave the way for a much stronger fourth quarter.
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Chart 7
