COMMODITIES PLUNGE MOST IN TWO YEARS -- ENERGY SHARES BREAK SUPPORT -- OVERSOLD DOLLAR RALLIES ON VOLUME -- EMERGING MARKET ISHARES TURN DOWN -- FALLING BOND YIELDS MAY BE WARNING FOR STOCKS
COMMODITIES PLUNGE... This morning's message showed a number of commodity ETFs falling below their 50-day lines and warned of a broader selloff in the making. By day's end, the CRB Index had fallen 17 points for the biggest loss in two years. Chart 1 shows the DB Commodities ETF (DBC) tumbling nearly 7% in massive trading. No commodity escaped the selling. Gold lost $40 (3%) while silver lost another 10%. Crude oil fell $12 (10%). Copper lost 4%. Part of the reason for the heavy commodity selling was a sharp rebound in the U.S. Dollar. Chart 2 shows the PS Dollar Bullish ETF (UUP) gapping up 1.3% in the heaviest trading this year. Most of the dollar strength came from a falling Euro which tumbled 2% on the ECB suggestion that another rate hike was being postponed. The breakdown in commodities (and copper in particular) is especially troubling since it suggests that the global economy is slowing. That may also explain why bonds are rallying and stocks are correcting around the world. That's especially true of emerging markets which led the decline.
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Chart 1
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Chart 2
COMMODITY EXPORTERS LEAD EEM LOWER ... Emerging markets were among the day's biggest losers and they suffered the most technical damage. Chart 3 shows Emerging Market iShares (EEM) falling below its 50-day lne and mid-April low. The biggest BRIC losers were commodity producers like Russia and Brazil. Chart 4 shows Market Vectors Russia ETF (RSX) falling to a new five-month low. Russia is closely tied to energy prices. Brazil is doing even worse. Chart 5 shows Brazil iShares (EWZ) closing below its 200-day moving average. China (not shown) is retesting its 200-day line, while India has fallen back below that long-term support line. Needless to say, weakness in those markets isn't a good sign for other global stock markets.
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Chart 3
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Chart 4
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Chart 5
COMMODITY STOCKS TUMBLE... The April peak in gold and silver shares gave an early warning that precious metals were due for a fall. Not surprisingly, mining shares were among the day's biggest losers. Chart 6 shows the Silver Mining ETF (SIL) tumbling another 6% today in very heavy trading. Gold stocks were nearly as bad. Chart 7 shows the Gold Miners ETF (GDX) falling nearly 4% on big volume. The GDX closed below its 200-day line. Notice the drop in their relative strength lines (below charts) starting in mid-April. The same warning was given by energy shares which were today's biggest losers. Chart 8 shows the Energy SPDR (XLE) falling below its April low on huge volume. Oil Service Holders (OIH) in Chart 9 did even worse and fell to a three month low in heavy trading. Their relative strength lines also peaked during April and was the earliest warning of an impending downturn in these stocks and their related commodities.
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Chart 6
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Chart 7
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Chart 8
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Chart 9
DROP IN BOND YIELDS MAY BE WARNING FOR STOCKS ... Bonds have benefited from the plunge in commodities. Several bond ETFs have rallied to the highest levels in months. Rising bond prices are pushing bond yields lower. And that may be a warning for stocks. That's because bond yields (which are a barometer of economic strength) have been positively correlated to stocks. Chart 10, for example, shows the S&P 500 bars and the 10-Year T-Note Yield (green line) moving up together until April. Since mid-April, however, bond yields started dropping and have now fallen to the lowest level in five months. That divergence between falling bond yields and rising stocks isn't likely to continue. If bond yields are falling because of fears of economic weakness, that should start to pull stocks lower as well. My morning message today also showed some other technical divergences on the S&P 500 which are warning signs. I also wrote recently that the type of sector rotation we've seen since April out of energy and basic materials and into defensive groups like consumer staples, healthcare, and utilities is usually associated with a market correction.
