BASIC MATERIALS LEAD MARKET RALLY ON WEAKER DOLLAR AND STRONGER COMMODITIES -- FREEPORT MCMORAN COPPER & GOLD TRACKS RISING COPPER PRICE -- MARKET INDEXES TEST AUGUST HIGH AS WEEKLY MACD LINES TURN POSITIVE
BASIC MATERIALS LEAD MARKET RALLY... I wrote on Tuesday that strength in foreign currencies (especially commodity currencies like the Aussie and Canadian Dollars) was negative for the U.S. Dollar but positive for most commodities. One reason for that view is that stronger foreign currencies suggest growing confidence in the global economy. Another sign of growing optimism is that basic materials (which are tied to commodites) have been the strongest market sector since the market bottomed in early July. Chart 1 shows the Materials Sector SPDR (XLB) already trading at the highest level in more than four months. Its rising relative strength ratio (below chart) has been rising over the last two months which shows superior performance by the economically-sensitive group. Another reason for their superior performance since the start of July is the fact that the U.S. Dollar is weakening again. That's normally bullish for commodities and stocks tied to them.
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Chart 1
FALLING DOLLAR BOOSTS MATERIAL STOCKS ... Over the last three years, the U.S. Dollar and stocks have generally trended in opposite directions. That's mainly because money has flowed into the greenback as a safe haven when stocks have fallen and out of the dollar when stocks have rallied. That same inverse relationship has existed between the dollar and basic materials. The best way to see the more direct dollar impact on material stocks is with a relative strength ratio. Chart 2 compares the XLB:SPX ratio (orange line) to the Dollar Index (green line) over the last three years and shows a close link between the two lines. In other words, basic materials usually underperform the S&P 500 when the dollar is rising (like during 2008 and the first half of 2010) and outperform when the dollar is falling (like during 2009 and the summer of 2010). Chart 3 compares the two lines during 2010 and reveals that the upturn in materials' relative performance coincided with the early June dollar peak. That's to be expected since most industrial commodites (like copper and oil) bottomed at the same time. That's also when silver prices started to outpace gold which is another sign of economic strength as I described on Tuesday (see lines below Chart 3). The intermarket message is this: A weaker U.S. dollar (and stronger foreign currencies) imply more confidence in the global economy which is bullish for commodities and stocks tied to commodities. It's also a positive message for global stocks which are leading the U.S. market higher.
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Chart 2
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Chart 3
FCX TRACKS RISING COPPER PRICE... One of the material stocks helping boost that sector is Freeport McMoran Copper & Gold. Chart 4 shows the stock having reached a five-month high and showing relative strength (see ratio below chart). The line on top plots the price of copper. Although FCX deals in gold and copper, it tracks the latter market more closely. So a vote for FCX is also a vote for copper. A vote for copper is a vote for global economic strength (especially in China). Although the stock looks over-extended at the moment, its relatively strong performance of late may be suggesting that the global picture for commodities and stocks in general is improving. We're getting the same message from rising foreign currencies (including the Euro) and a weaker dollar.
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Chart 4
S&P 500 TESTS AUGUST HIGH -- MACD LINES ARE POSITIVE... The moment of truth for the stock market is at hand. The daily bars in Chart 5 show the S&P 500 right up against its August intra-day high at 1129. A close at 1130 or higher (hopefully on stronger volume) would be a bullish breakout. Chart 5 shows daily MACD lines in bullish alignment. More importantly, the weekly MACD lines in Chart 6 are starting to turn positive for the first time since May. Weekly signals are more important than dailies and have a more significant impact on the market's direction. [One caveat: weekly signals aren't official until Friday's close.] A positive backdrop is also provided by monthly MACD lines (not shown) which have been positive since last summer and remain so. I remain of the opinion that any market surprise between now and yearend will probably be to the upside. I'll feel a lot stronger about that if and when all major market indexes have exceeded their August highs on rising volume. So far, only the Nasdaq 100 has broken through its August high. In the meantime, a lot of chartists are watching to see if the S&P 500 can stay above its (red) 200-day average at 1116.
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Chart 5
