INTERMARKET TRENDS TURN MORE NEGATIVE FOR STOCKS -- NEW LOWS BY BOND YIELD AND COMMODITIES ARE SIGNS OF WEAKNESS -- SO ARE WEAKER FOREIGN STOCKS WHICH MAY BE TRACING OUT A HEAD AND SHOULDERS TOP -- DOLLAR AND YEN RISE WHILE OTHER CURRENCIES TUMBLE
BOND YIELDS AND COMMODITIES HIT NEW LOWS... Everywhere I look I see more serious warning flags for the U.S. stock market. Two of them are coming from recent breakdowns in bond yields and commodity prices. Chart 1 shows the 10-Year T-Note Yield (green line) and CRB Index (brown line) falling to new lows. Bond yields are now at the lowest levels in sixty years. Over the past few years, a positive correlation has existed between commodity prices, bond yields, and stock prices. That relationship weakened during the first quarter, but now appears to be re-asserting itself. Falling commodity prices imply global economic weakness. Falling bond yields imply the same. A collapsing Euro (along with foreign stocks) is pushing money into the relative safety of Treasuries and the U.S. Dollar. Rising bond prices equate to lower yields. A rising dollar equates to falling commodity prices. Falling bond yields and commodities are now leading to falling stock prices. The rising dollar is also taking a more serious toll on foreign stocks. Their technical condition looks a lot weaker than the U.S. Problem is weakness there causes weakness here as well.
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Chart 1
FOREIGN STOCKS LEAD U.S. LOWER... Chart 2 compares the Vanguard FTSE All-World Ex-US stock index (red line)to the S&P 500 (blue line) over the last four years. The chart shows that domestic and foreign stocks usually trend in the same direction. A huge "negative divergence" has developed during 2012 however. While the S&P 500 exceeded its 2011 high, foreign stocks (developed and emerging) didn't even come close to testing their 2011 highs. In technical work, when two lines that usually trend upward in the same direction diverge from one another (in other words, one doesn't confirm new highs in the other), a warning is given of a trend reversal to the downside. Since the start of March, foreign stocks have fallen 14% versus a 5% loss for the S&P 500. The bigger drop in foreign stocks is largely due to the surge in the U.S. Dollar. That's because a rising dollar takes a bigger toll on foreign stocks. The fact that most foreign currencies (with the exception of the yen) are also falling is hurting foreign stocks. Money flowing into U.S. Treasuries is also giving a boost to the dollar. The rising dollar is hurting foreign stocks tied to commodities like Brazil, China, Canada, and Australia. That's another reason why foreign stocks are falling faster.
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Chart 2
FOREIGN HEAD AND SHOULDER TOP ... I wrote about the possibility that foreign stocks were forming a "head and shoulder" top a couple of weeks ago. But I believe it bears repeating. That possibility really worries me. Judge for yourself. Chart 3 shows the Vanguard All-World ex-US ETF (VEU) from its 2009 bottom. In my view, the price pattern since the start of 2010 has the look of a potential H&S top. [A H&S top is defined by three peaks, with the middle peak (the head) surrounded by two lower peaks (the shoulders)]. Unless I'm seeing things, Chart 3 appears to be tracing out a textbook H&S top. The trendline drawn undere the 2010/2011 lows represents the "neckline". A decisive drop below that support line would complete the top and signal lower prices. [An alternate bearish view requires a close below the fourth quarter low]. Either way, the pattern scares me. If foreign stocks are in fact tracing out a major top, there's no way U.S. stocks will escape more serious damage. They may not fall as far, but they will fall some more.
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Chart 3
DOLLAR INDEX BREAKS OUT TO THE UPSIDE... Money continues to flow into the safe haven of the U.S. Dollar. Chart 4 shows the PowerShares Dollar Bullish Fund (UUP) exceeding its January high to reach the highest level in eighteen months. Most of that gain is coming form a tumbling Euro. [The Euro accounts for 57% of the trend in the UUP]. Chart 5 shows the Euro tumbling to the lowest level since the summer of 2010. Chart 6 shows the Canadian Dollar tumblng as well (along with falling commodity prices). Some forex money is flowing into the safety of the Japanese yen (orange matter). At the moment, the four markets attracting safe haven money are the dollar, the yen, U.S Treasuries, and the German Bund.
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Chart 4
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Chart 5
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Chart 6
NYSE % OF STOCKS ABOVE 200-DAY AVERAGES NEARS 50%... A number of U.S. stock indexes are in the process of testing their 200-day averages. The same is true of individual stocks. Chart 7 shows the NYSE % of Stocks Above 200-Day Moving Average falling from over 75% during March to 50%. A drop below 50% would mean that more than half of NYSE stocks have fallen below that important support line. Last year's correction took that line all the way down near 10%.
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Chart 7
WEEKLY MACD LINES TURN NEGATIVE ... The weekly bars in Chart 8 show the S&P 500 in the process of testing its 40-week moving average (which is the equivalent of the 200-day line). That's an important test. Unfortunately, foreign stock markets have already broken that support line. I'm also concerned about the fact that weekly MACD lines (above chart) have turned negative for the third time since the start of 2010. The last two downturns led to deeper corrections. There's also something about the number three that bothers me. That's the same number of peaks that comprise the "head and shoulders" top in foreign markets. In my view, that increases the odds that the 40-week average will eventually be broken to the downside.
