EMERGING MARKETS ISHARES BACK OFF FROM PREVIOUS HIGH ON BRIC WEAKNESS -- EUROPEAN HOLDERS TEST RECENT HIGH AS BRITAIN WEAKENS -- S&P 500 REMAINS ABOVE 20-DAY AVERAGE AS VIX CONTINUES TO TEST OVERHEAD RESISTANCE
CHINA AND INDIA PULL EEM LOWER... I wrote an article last Thursday about the growing likelihood of a stock market pullback. That earlier piece was based mainly in signs of a short-term overbought condition. Another warning sign of a stock pullback is coming from emerging markets which have been market leaders since the market bottomed in the spring of 2009. Not anymore. In fact, emerging markets have been underforming the rest of the world for the last three months. Chart 1 shows Emerging Market iShares (EEM) in danger of falling below its 50-day moving average today after failing to exceed its November high at the start of the new year. The EEM:$SPX ratio (top of Chart 1) shows that the EEM has been underperforming the US market since early November. The daily MACD lines (below chart) are also negative. It's not hard to see where most of the EEM selling is coming from. Three of the top BRIC countries are experiencing selling. Chart 2 shows Brazil iShares (EWZ) looking very similar to the EEM after failing to exceed its fourth quarter high. Most of the weakness is coming from China and India. Chart 3 shows China iShares (FXI) trading 10% below its November high and bearing down on its 200-day average. India looks even worse. Chart 4 shows the iPath the MSCI Index ETN (INP) trading 16% off its November high and in danger of slipping below its 200-day moving average. Note the falling RS lines for all three emerging markets. At the very least, those selloffs should serve as a warning that more developed markets (like the US) can't count on upside leadership from those former leaders -- at least over the short run.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
EUROPE ISHARES TEST NOVEMBER HIGH AS UK WEAKENS... Europe has experienced a nice rebound over the last month. A lot of that is due to reduced fears about sovereign defaults and the jump in the Euro. Chart 5 shows Europe 350 iShares (IEV) testing its early November high. The IEV includes European stocks that are diversified across countries and sectors. The IEV:SPX ratio (top of Chart 5) has rebounded over the last month. Notice how closely Europe's relative performance tracks the Euro (bottom of Chart). The IEV is representative of most of the larger individual European country ETFs. Despite that improvement, there are at least two immediate concerns in Europe. The first is simply the fact that several countries are up against potential resistance at their November peak. That's a logical spot to expect some profit-taking. A second concern is Chart 6 which plots the United Kingdom iShares (EWU). That chart shows the EWU falling nearly 2% today which puts it well below its November peak. Today's selling is the result of the surprising drop in the UK's fourth quarter GDP. It just so happens that Britian is the country most heavily weighted in the IEV. That's another short-term concern for the rest of the Europe (and maybe even the US).
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Chart 5
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Chart 6
S&P 500 STILL ABOVE 20-DAY LINE... Last Thursday's message showed the S&P 500 testing its 20-day moving average (Chart 7). Fortunately, that initial support line held which kept the short-term uptrend intact. Unfortunately, that didn't improve the daily RSI and MACD lines which remain negative. Another concern noted last week is the recent uptick in the CBOE Volatility (VIX) Index from chart support along last spring's low. No upside breakout has taken place in the VIX, but it continues to pressure overhead resistance formed during December and January (Chart 8). A close over 19 by the VIX would increase the odds for a market pullback. If that were to occur, initial S&P support is likely at its lower Bollinger band or its 50-day moving average (blue arrow). Since much of the recent global selling is happening in commodity-oriented countries like Brazil and China, commodities appear vulnerable to short-term selling along with stocks.
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Chart 7
