EURO WEAKNESS/DOLLAR STRENGTH PRESSURES STOCKS AND COMMODITIES -- EMERGING MARKETS WEAKEN -- FINANCIALS WEAKEN AS TECHS MEET RESISTANCE NEAR OLD HIGH -- DROP IN BOND YIELDS MAY EXPLAIN RECENT MOVE INTO DIVIDEND PAYING STOCKS -- S&P RETESTS NECKLINE
EURO BREAKS 50-DAY LINE... Last week's sharp drop in the Euro (and rebound in the dollar) contributed to heavy selling in commodity assets and increased the odds for a stock correction. Unfortunately, the short-term picture has weakened more with the Euro falling below its 50-day average for the first time in four months (Chart 1). Chart 2 shows the Bullish Dollar ETF (UUP) trading above its 50-day line for the first time since January. That's keep commodities under some pressure. But it is also weighing on global stocks which are vulnerable to profit-taking.
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Chart 1
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Chart 2
EMERGING MARKET ISHARES LEADS STOCKS LOWER... My message from the previous Thursday showed Emerging Market iShares (EEM) slipping below its 50-day average and warned that it might be leading global stocks into a downside correction. Chart 3 shows the EEM having since fallen to the lowest level in two months and apparently headed for a test of its 200-day line. Chart 4 shows EAFE iShares (EFA) threatening to break its 50-day line as well. Short-term indicators like RSI and MACD lines have turned negative.
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Chart 3
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Chart 4
FINANCIALS NEAR 2011 LOW AS TECHS BACK OFF FROM OLD HIGH ... Financials are the day's weakest sector. Chart 5 shows the Financial SPDR (XLF) close to a new low for the year. Its relative strength line (below chart) has been falling since February. Chart 6 shows the Materials SPDR (XLB) threatening to break its mid-April low. Material stocks have gone from market leaders to market laggards over the last month. Technology has been one the market's most resilient sectors. Chart 7, however, shows the Technology SPDR (XLK) stalled near resistance at its February high. That would be a logical spot for technology stocks to start experiencing some profit-taking.
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Chart 5
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Chart 6
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Chart 7
S&P 500 RETESTS NECKLINE ... I showed this same chart the previous Thursday (May 5) as the S&P 500 was retesting the "neckline" drawn over its February/April highs. The neckline provided some support last week, but is being threatened again today. Any decisive close below that support line would signal that the market has entered into a downside correction. A decisive break of that neckline would also violate the green up trendline drawn under the March/April lows. As has been the case for the last month, defensive consumer staples and healthcare are the day's two strongest groups.
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Chart 8
AMGEN IS LATEST HEALTHCARE BREAKOUT... I've been showing a lot of upside breakouts in the consumer staples and healthcare sector. My healthcare picks have been mostly in big pharma. Here's a big one in the biotech group. Chart 9 shows Amgen surging through resistance around 58 to reach a new 52-week high. Its relative strength line (below chart) started rising during March after a long period of under-performance (like most other healthcare stocks). Its longer-term picture is even more encouraging. The weekly bars in Chart 10 show Amgen breaking a two-year resistance line in an apparent triangle formation. Its RS line (below chart) is starting to bounce for the first time in two years as well. Add Amgen to the list of large healthcare stocks that are achieving bullish breakouts.
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Chart 9
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Chart 10
FALLING BOND YIELDS BOOST DIVIDEND PAYING STOCKS ... Last Thursday's message warned that the drop in bond yields since February might carry a negative warning for stocks since it implies growing fears of economic weakness. The drop in bond yields also offers a clue into the recent rotation into defensive stocks groups. When bond yields fall, investors look for yield elsewhere. One place they look for yields is stocks that pay dividends which happen to be mostly in defensive groups like staples, healthcare, telecom, and utilities. The green line in Chart 11 is the 10-Year T-Note Yield (TNX). The blue line is a ratio of the DJ Select Dividend iShares (DVY) divided by the S&P 500. Notice that the two lines have been trending in opposite directions over the last year. Rising bond yields provide stiff competition for high-yielding stocks which tend to underform. Since rates peaked in February, however, money has poured into dividend-paying stocks which have become market leaders. That's partly a desire for higher yields. It may also be defensive maneuver to protect against any stock market correction that results from falling bond yields.
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Chart 11
WEEKLY RSI SHOWS NEGATIVE DIVERGENCE ... Weekly indicators also suggest some reason for more caution in stocks. Chart 12 overlays the 14-week RSI (blue line) on the weeky S&P 500 bars over the last three years. After giving an oversold reading below 30 during the fourth quarter of 2008, stocks rolled over into another downleg. The RSI, however, didn't follow stocks lower. A positive divergence between the RSI and stocks was created in spring 2009 (rising green trendline) which signalled a market bottom. We now have the opposite situation. The RSI reached overbought territory over 70 during February. Since then, stocks have reached a new high but the RSI hasn't followed (see falling red line). That negative divergence warns that the S&P 500 is in danger of succumbing to a downside correction or a period of consolidation. That may also explain why investors have been moving back into bonds and defensive stocks that pay dividends.
