RISING DOLLAR HAS NEGATIVE IMPACT ON US STOCKS AND COMMODITIES -- IT'S ALSO CAUSING FOREIGN SHARES TO FALL FASTER -- WHILE TREASURIES RALLY, CORPORATE BONDS FALL WITH STOCKS -- DEFENSIVE LEADERSHIP IS ANOTHER BAD SIGN FOR MARKET
RISING DOLLAR PUSHED GLOBAL STOCKS AND COMMODITIES LOWER... Stocks and commodities fell together this week. That isn't surprising since both asset classes have been positively correlated all year. Chart 1 shows the S&P 500 ending the week at a two-month low and well below both moving average lines. Chart 2 shows the DB Commodities Tracking Fund (DBC) looking pretty much the same. The 50-day Correlation Coefficient below Chart 1 shows a rising .81 correlation between the two markets (which means that there is a 81% correlation between the two markets. The most it can be is 100%). Foreign stocks did even worse. Chart 3 shows EAFE iShares trading even closer to its October low. There's one common factor contributing factor to the drops in all three charts -- the falling dollar (Chart 4). Commodities usually fall when the dollar rises. Dollar strength explains why foreign shares are falling even faster than those in the U.S.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
RISING DOLLAR HURTS FOREIGN SHARES MORE... One of the tenets of intermarket analysis is that a rising dollar hurts foreign shares more than those in the U.S. Chart 5 demontrates that happening this year. The red line is a ratio of the EAFE iShares (EFA) divided by the S&P 500. The green line is the Dollar Index (UUP). That relative strength ratio peaked during the spring right around the time that the dollar was bottoming. The sharp upturn in the dollar during September coincided with breakdown in the EFA/SPX ratio. Foreign stocks have been falling faster than the U.S. since then. Since the start of this year, the S&P 500 has lost 7%. By comparison, EAFE iShares have fallen 18%. Emerging Market iShares (EEM) have lost 23%.
(click to view a live version of this chart)
Chart 5
HIGH YIELD BONDS FALL WITH STOCKS ... While Treasuries were the safe haven winners this week, corporate bonds fell with stocks. Chart 6 shows the iBoxx Investment Grade iShares (LQD) falling well below its 50-day line this week. The 50-day correlation coefficient below Chart 6 measures the correlation between the LQD and S&P 500 and turned positive a month ago. That means corporate bonds are now acting more like stocks than bonds. That's even more true with high-yield corporates. Chart 7 shows the iBoxx High Yield iShares (HYG) tumbling to the lowest level in nearly two months. Notice how closely the HYG is tracking the S&P 500 (top line). The 50-day correlation coefficient below Chart 7 shows a positive correlation of .94 between junk bonds and stocks.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
VIX NEARS UPSIDE BREAKOUT... The so-called "fear gauge" which is the CBOE Volatility (VIX) Index appears to be on the verge of an upside breakout. Chart 8 shows the VIX in a rising trend since late October and nearing a test of its recent highs around 37.5. A close above that level would represent an upside breakout in the VIX. A higher VIX is a negative sign for stocks.
(click to view a live version of this chart)
Chart 8
DEFENSIVE LEADERSHIP... Chart 9 measures the relative performance of three leading market sectors compared to the S&P 500 which is the flat black line. The three rising relative strength lines show the top sectors over the last month to be utilities (red line), staples (blue line), and healthcare (green line). It's usually a bad sign for the market when those three defensive sectors are market leaders. So is the fact that consumer discretionary stocks are under-performing consumer staples. I wrote about that on Tuesday. Chart 10 shows the XLY/XLP ratio turning down over the last month. That's another bad sign for the market.
Chart 9
