DOLLAR BOUNCE PUTS MORE DOWNSIDE PRESSURE ON COMMODITIES -- BREAKDOWN IN COPPER HINTS AT ECONOMIC WEAKNESS -- THAT'S GIVING A BOOST TO BONDS BUT LEAVES STOCKS VUNERABLE -- WEEKLY STOCK CHARTS SHOW NEGATIVE DIVERGENCE
EURO SELLING BOOSTS OVERSOLD DOLLAR... Arthur Hill's Monday message showed the U.S. Dollar Index in oversold territory for the first time in eighteen months. I warned on Tuesday that a dollar bounce would put even more downside pressure on commodities. Commodity selling started in silver and has spread to the entire group. Weakness in stocks tied to commodities -- energy, materials, and mining -- has been another warning that an over-extended commodity rally was in need of correcting. When commodities correct, it's natural to expect a dollar bounce. And we're finally getting one today. Chart 1 shows the PS Dollar Bullish ETF (UUP) gapping nearly 1% higher today. Its RSI line recently dropped below 30 which signalled its oversold condition. The main catalyst in today's dollar bounce is selling in the Euro. Chart 2 shows an overbought Euro falling more than 1%. That's because the ECB president this morning suggested that another European rate hike was unlikely in the near future. The combination of a weaker Euro and stronger greenback has put even more downside pressure on a weak commodity group. Commodity selling is also being attributed to new signs of economic weakness. That's causing selling in stocks and buying of bonds.
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Chart 1
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Chart 2
COMMODITIES TUMBLE ... My market messages over the last week have focused on the downturns in silver and gold. Both markets remain under pressure. Today's commodity selling is on a much broader scale. Chart 3 shows the DB Commodities Tracking Index (DBC) gapping 2.9% lower and falling below its 50-day average for the first time in five months. Chart 4 shows the United States Oil Fund (USO) falling below its 50-day line and initial chart support near 42. Copper is also falling hard. Chart 5 shows the iPath Copper ETF (JJC) tumbling nearly 3% to a five-month low. Since copper is often viewed as an indicator of global economic trends, it's breakdown has to be taken as a warning. That's potentially bad for stocks but good for bonds.
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Chart 3
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Chart 4
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Chart 5
BONDS RALLY ... The combination of commodity weakness and new signs of a slowing economy are pushing some money back into bonds. Chart 6 shows the Barclays Aggregate Bond iShares (AGG) rallying to the highest level in six months. Chart 7 shows the bond rally taking place in Investment grade corporates (blue line) and Treasuries (red line). High yield bonds (black line) which are closely tied to stocks may be vulnerable to some profit-taking if the stock market corrects.
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Chart 6
Chart 7
STOCK ARE VULNERABLE TO PROFIT-TAKING ... Given the close link between stocks and commodities, and the inverse correlation between stocks and bonds, the stock market appears vulnerable to more profit-taking. Chart 8 shows the S&P 500 retesting the "neckline" drawn over its March/April highs (on rising volume). A decisive close below that line would signal a market correction. If a downturn does materialize, the S&P 500 could retest its 100-day average which is the green line in Chart 8. That support line contained the market selloffs during March and April. That makes it an important support point. The weekly bars in Chart 9 also suggest that a correction is due. Notice the "negative divergence" between the weekly SPX bars during May and the falling 14-week RSI (red line). Also of concern is the fact that weekly MACD lines (below chart) are in negative territory. I've been writing over the last week about the negative warning coming from the recent rotation into defensive groups like consumer staples, healthcare, and utilities (and the breakdown in energy and materials). That type of defensive rotation is normally associated with market corrections.
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Chart 8
