FOREIGN STOCKS ARE ALREADY IN BEAR MARKET TERRITORY WITH THE US HEADING IN THE SAME DIRECTION -- SURGING DOLLAR PUSHES COMMODITIES SHARPLY LOWER -- CHINESE STOCK MARKET HAS ALREADY LOST 30% AND WARNED OF GLOBAL WEAKNESS
GLOBAL BEAR PULLS US MARKET LOWER... One of the basic elements of intermarket analysis is the close linkage among global stock markets. In other words, they rise and fall together. Right now, they're falling. A bad sign for the U.S. market is that foreign markets are falling even faster. Chart 1 compares the relative performance of the S&P 500 to foreign developed and emerging markets (through yesterday's close). From the start of April, Emerging Market iShares (red line) have lost 25% while EAFE ishares (blue line) have lost 20%. Both have reached the bear market threshold of 20%. The S&P 500 (blue line) had fallen only 15% as of yesterday, keeping it in correction territory. After today's global collapse, it won't be long before the U.S. market crosses the 20% threshold into bear market territory as well.
Chart 1
DOLLAR RALLY HURTS FOREIGN STOCKS MORE... We've explained in previous messages that a rising dollar is bad for stocks (and commodities). But it's especially bad for foreign stocks which do even worse when the dollar is rising. Chart 2 demonstrates that the rising dollar is one of the factors causing foreign stocks to fall faster than those in the U.S. The green line shows the Dollar Index surging to a new seven-month high during September. The red line is a "ratio" of EAFE ishares divided by the S&P 500, and shows what foreign stocks are doing "relative" to those in the U.S. A pretty clear inverse relationship can be seen between the two lines. That's especially true over the last month when a surging dollar caused the ratio line to drop to a new 2011 low. In other words, the rising dollar has caused foreign stocks to fall a lot faster than the U.S. That may offer some comfort (but not much) to holders of U.S. stocks which are falling more slowly.
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Chart 2
CHINA COLLAPSE HURTS COPPER... News of manufacturing weakness in China is being given in the media today as one of the reasons for today's 5% plunge in that country's stock market and the accompanying plunge in global stocks. There's more urgent talk of a global recession. I heard someone say on TV this morning that weakness in Chinese manufacturing means that the world may lose its leadership. What leadership? Apparently, the media (and most of the economic community) aren't aware that Chinese iShares have fallen 30% from their fourth quarter highs of last year (red line in Chart 3). That makes China one of the world's weakest markets over the last year. The collapse in Chinese shares (along with other large emerging markets) was a clear early warning that the global economy was slowing. It took Mr. Bernanke's belated recognition yesterday that the U.S. economy faces significant downside risks to catch everyone's attention. Economists never seem to understand that falling stock prices usually precede an economic slowdown. So do falling copper prices. I mentioned on Tuesday that collapsing copper prices were another sign of a slowing global economy. That's the brown line in Chart 3. Notice the close correlation between copper prices and Chinese stocks. Both have collapsed together during August and September. China is the world's biggest importer of copper. Falling Chinese shares (and a rising dollar) are other reasons that economically-sensitive commodity prices (and stocks tied to them) are also falling sharply.
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Chart 3
SURGING DOLLAR PUSHES COMMODITIES TO NEW LOWS... Today's surge in the Dollar Index to a new seven-month high (Chart 4) is having a very depressing impact on commodities. Chart 5 shows the DB Commodities Tracking Index (DBC) tumbling 3% to a new 2011 low. All commodities are in the red with biggest percentage losses in economically-sensitive copper and oil. Gold and silver prices are also falling in an attempt to raise some cash.
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Chart 4
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Chart 5
PLUNGING BOND YIELDS PULL STOCKS LOWER ... Bond yields are tumbling again today after yesterday's Fed announcement that it plans to push them even lower. The green line in Chart 6 shows the 30-Year T-Bond Yield falling below 3% today (as bond prices soar). As we've been pointing out for months, falling bond yields have been leading stocks lower all year (purple line). So far, there's no sign of that changing. That's bad news for stocks.
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Chart 6
NYSE INDEX HITS NEW LOW -- S&P 500 IS NEXT ... The three U.S. stock indexes shown below paint a bearish picture. Chart 7 shows the NYSE Composite Index already at a new 52-week low (due mainly to its heavy weighting in basic material stocks). Chart 8 shows the S&P 500 undercutting its early September low and six-week support line. Its August low is now in jeopardy. Chart 9 shows the Nasdaq Composite gapping 3% lower after failing a test of overhead resistance near 2600. With the summer rebound having ended, the path of least resistance is now down. September is living up to its reputation as one of the market's cruelest month.
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Chart 7
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Chart 8
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Chart 9
EXPECT S&P 500 DROP TO 2010 LOWS... With the recent short-term bounce having ended, and new 2011 lows expected, our next downside target remains to the lows formed during the spring and summer of 2010 near 1025 (see green line in Chart 10). That's the same downside target that Arthur Hill and myself have shown in several previous market messages.
