FOREIGN SHARES LEAD US MARKET LOWER -- PLUNGING EURO IS TESTING 2010 LOW -- WATCH OUT FOR NEW DOW THEORY SELL SIGNAL AS TRANSPORTS LEAD INDUSTRIALS LOWER -- CYCLICAL STOCKS ARE LEADING THE MARKET LOWER WHICH IS A NEGATIVE SIGN
VANGUARD ALL-WORLD EX-US INDEX BREAKS SUPPORT... As has been the case since the spring, foreign shares are leading the U.S. stock market lower. More importantly, they've already broken below some short-term chart support. The Vanguard FTSE All-World Index (VEU) includes foreign developed and emerging markets. Chart 1 shows the VEU falling below its mid-July low (on rising volume). That break of support puts the summer rally in jeopardy and increases the odds for a retest of the June low. Some of the biggest foreign losses are occurring in Europe. While the biggest losses there are in countries like Italy and Spain, some of the stronger Eurozone countries are weakening as well. Chart 2 shows Germany iShares (EWG) also falling below its July low. No part of the world has escaped the selling. The plunging Euro has pushed the Dollar Index into another upside breakout. That's pressuring stocks and commodities which are falling. Bonds are once again the day's winner as bond yields continue to drop.
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Chart 1
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Chart 2
EURO NEARS TEST OF 2010 LOW... Chart 3 shows the Power Shares U.S. Dollar Index Bullish Fund (UUP) moving above its summer high to reach the highest level in eighteen months. Most of that strength is coming from the falling Euro. Chart 4 shows the Euro falling to the lowest level since the middle of 2010. That will be a very important test. If the Euro is going to find a bottom, that's a logical spot for it to happen. If the Euro breaks that 2010 trough, things could get a lot worse. The monthly bars in Chart 5 show how important the 2010 low is. The Euro has formed a pattern of declining peaks since 2008 (falling trendline). The 2010 Eurozone crisis ended with the Euro bouncing off the 120 level. It is now bearing down on that previous low (flat line). Needless to say, any serious drop below that support level would inflict serious damage to its trend structure.
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Chart 3
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Chart 4
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Chart 5
WATCH OUT FOR NEW DOW THEORY SELL SIGNAL ... Last Tuesday's message showed trucking stocks pulling the Dow Transports lower, and suggested that might carry a negative warning for Dow Theorists. Actually, that negative warning started more than a month ago. Chart 6 shows the Dow Transports forming a pattern of lower peaks since mid-June. By contrast, Chart 7 shows the Dow Industrials forming three rising peaks. The failure of the transports to confirm the rising peaks in the industrials formed a "negative divergnene" between the two. Things got worse this week. Chart 6 shows the transports having broken intial support at its early July low. Chart 7 shows the Dow Industrials threatening its July low near 12500 and its 200-day average. A Dow Industrial close below that support level would push both Dow Averages below support and would trigger a new Dow Theory sell signal. Last week's transportation weakness came mainly from truckers. This week's biggest selling has been in airlines and air freight. All of the them are economically-sensitive. It's not a good sign for the market when economically-sensitive stocks are leading it lower.
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Chart 6
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Chart 7
CYCLICAL STOCKS FALLING FASTER THAN S&P 500 ... One of the ways to measure the strength of the economy and the stock market is to see how cyclical stocks are faring. Those are stocks that rise and fall with the ups and downs of the business cycle (hence their name). The index most commonly used to measure that group is the Morgan Stanley Cyclicals Index (CYC). [The CYC includes 30 stocks from 25 economically-sensitive industries including autos, metals, papers, machinery, and transportation]. When investors are optimistic on the economy and the market, cyclical stocks show upside leadership. When they're more negative, cyclical stocks lead the market lower (which is what they're doing now). Chart 8 shows the cyclical index leading the S&P 500 lower. In fact, the CYC has lost 15% since the start of April, which is three times as bad as a 5% drop in the S&P. That's a sure sign that investors are more pessimistic on the economy and the stock market. The inability of the CYC to bounce along with the SPX since June (see box) also calls into question the staying power of that summer rally in the broader market.
