BRITISH POUND HITS NEW HIGH VERSUS THE DOLLAR -- THE EURO MAY BE NEXT -- CANADIAN ISHARES OFFER GOOD WAY TO PLAY THE FALLING DOLLAR AND RISING COMMODITIES -- COAL STOCKS ARE ANOTHER GOOD WAY -- RAILS RIDE COAL HIGHER LED BY CSX
RISING INFLATION PUSHES POUND HIGHER... The latest British CPI report came in much higher than expected and increased pressure for a British rate boost. That pushed the British Pound to the highest level against the U.S. Dollar in more than a year (Chart 1). The Euro may be next. Chart 2 shows the Euro challenging its November high. The European central bank has already stated that a rate hike in April is likely. [The Japanese yen hit an all-time high against the dollar last week before central banks intervened to push it lower]. With the Fed anchoring U.S. short-term rates near zero, market forces continue to push foreign currencies higher and the U.S. Dollar lower. One country that benefits from both of those trends is Canada.
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Chart 1
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Chart 2
EWC OUTPERFORMS US AND EFA ... Chart 3 compares the performance of Canadian iShares (red line) against the S&P 500 (blue line) and EAFE iShares (black line) over the last year. The green line is the CRB Index which shows a 25% rise making commodities the top asset class. The top stock performer of the three shown is Canadian iShares (+27%). The S&P 500 came in second (+16%) while EFA ishares is third (+10%). [EAFE stands for Europe Australasia and the Far East and doesn't include Canada]. There are several points to be made from the chart. The most obvious is that rising commodities are very good for Canadian stocks. More than half of the stocks in Canadian iShares are natural resource stocks which are closely tied to the trend of commodity prices. One of the factors pushing commodity prices higher is the falling U.S. currency and a strong Canadian Dollar. The EWC gets a double boost from a strong Canadian currency.
Chart 3
RISING $CDW GIVES EWC ADDED BOOST... There's another advantage to buying Canadian iShares versus Canadian stocks in general. While Canadian stocks are priced in Canadian Dollars, the EWC is traded in the U.S. and quoted in U.S. Dollars. As a result, the EWC is stronger than Canadian stocks when the $CDW is rising and the U.S. Dollar falling (as it is now). The red line in Chart 4 is a relative strength "ratio" of Canadian iShare (EWC) divided by the Toronto Index ($TSX) over the last year. The rising red line shows the EWC outperforming the TSX by a fairly wide margin (28% versus 19%). The reason for the superior performance of the EWC is the rising Canadian Dollar (green line) above Chart 4. Notice that a rising Canadian Dollar (CDW) causes Canadian iShares to rise faster than their cash equivalents in Canada. [An index quoted in a weaker currency will always rise faster than one quoted in a stronger currency]. That by the way is true of all foreign stock ETFS. Any foreign stock ETF will rise faster than its local stock market when its currency is rising faster than the U.S. currency. In this case, the rising Canadian Dollar is another reason to favor the EWC. Canada then (especially with the EWC) is a good way to play a falling dollar and rising commodities.
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Chart 4
COAL STOCKS CONTINUE TO OUTPERFORM... Stocks tied to coal continue to do especially well. Chart 5 compares the trend of the Market Vectors Coal ETF (KOL) versus the S&P 500 since last spring. The KOL is up more than twice as much as the SPX. That was especially true over the last week (see circle) as the disaster in Japan pushed traders toward non-nuclear sources like solar energy, natural gas, and coal. Japan is the world's largest importer of coal. And it's going to need a lot more to help rebuild. Global demand for coal also remains very high. The simplest way to play the coal group is through the KOL which includes a basket of U.S. and foreign stocks tied to that commodity. Chart 6 shows a couple of individual coal stock standouts. Peabody Energy (BTU) is trading at a new three-year high. The red line shows Yanzhou Coal Mining (YZC), which is the strongest and most highly rated Chinese stock in the KOL, nearing another upside breakout.
Chart 5
Chart 6
RAILS RIDE THE COAL RALLY ... U.S. rail stocks are big movers of commodities, and coal in particular, which may explain this week's uspide breakout in that group. Chart 7 shows the Dow Jones US Railroad Index breaking through its February high to register a new record. The strongest rail stock is CSX which not only hit a new 2011 but a new record high as well (Chart 8). CSX transports goods in the U.S. and Canada. Among other things, CSX exports coal to electricity-generating power plants and steel manufacturers . Chart 9 shows Norfolk Southern also hitting a new high for the year and nearing a challenge of its 2008 high near 70.
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Chart 7
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Chart 8
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Chart 9
GOLD MINERS ETF CLEARS 50-DAY LINE... Precious metals are another way to benefit from a falling U.S. Dollar. Last Thursday's message showed the Market Vectors Gold Miners ETF (GDX) bouncing off its 200-day average for the second time this year. I suggested that gold stocks offered a bargain at current levels and a good entry point. Chart 10 shows the GDX rising back above its 50-day line for the first time in a month which strengthens the bullish case.
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Chart 10
S&P 500 MEETS MEETS RESISTANCE AT 50-DAY LINE... Last Thursday's message showed the S&P 500 bouncing off its 100-day average (green line) and suggested that the panic selling had probably ended. Chart 11 shows the S&P meeting some resistance at the 50-day line (near 1300). There's also chart resistance along the early March low (see line). What the market does from here will help determine if the correction is over or if more work needs to be done to repair recent short-term chart damage. The 100-day average is taken from "weekly" Bollinger bands and is based on a 20-week moving average which acts a longer-term support line. The 20-"day" average is a shorter-term indicator. Chart 12 shows the S&P also meeting some resistance at its 20-day line just above 1300. The S&P needs to clear those moving average lines to signal that the worst is over.
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Chart 11
