UPTURN IN BOND YIELD AND DOWNTURN IN PRICE SHOW MORE OPTIMISM -- SO DO RISING EURO AND WEAKER DOLLAR -- YEN WEAKENS AS MONEY FLOWS INTO AUSSIE AND CANADIAN DOLLARS -- CANADA ISHARES CLEAR 200-DAY AVERAGE -- FOREIGN STOCK BENCHMARKS TURN UP

BONDS BREAK 50-DAY AVERAGE... For the first time in four months, bond yields are rising and bond prices falling. Chart 1 shows the 10-Year T-Note YIeld (TNX) trading above its 50-day average for the first time since early April. At the same time, the 20+Year Treasury Bond iShares (TLT) are falling below their 50-day line (Chart 2). [Bond yields and prices trend in opposite directions]. That's partially the result of falling bond yields in Europe's weaker economies like Italy and Spain, which is causing some money to flow back into that region's bonds. When money goes there, it usually comes out of here. More optimism in Europe is also pushing some funds back into global stocks. Money moving into stocks usually comes out of bonds. In other words, today's upturn in bond yields (and drop in bond prices), is a sign of more global optimism. That's helping stocks and commodities. It's also helping risk-on currencies like the Australian and Canadian Dollars, and hurting risk-off currencies like the U.S. dollar and Japanese yen.

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Chart 1

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Chart 2

EURO ALSO CLEARS 50-DAY LINE AS DOLLAR DROPS... Another reason for global optimism is coming from currencies. The European currency is in the process of testing important chart support which was formed during 2010 at 120. So far, the Euro is managing to hold above that critical chart point. Chart 3 shows the Euro trading above its 50-day average for the first time in three months. Daily RSI and MACD lines have formed a pattern of "rising bottoms" since June which is another positive sign. At the same time, the U.S. Dollar Index has fallen below that its 50-day line (Chart 4). Another sign of optimism is that money is flowing back into commodities currencies like the Aussie and Canadian Dollars, and out of the safe haven yen. Chart 5 shows the Aussie Dollar/ Japanese yen cross trade at a new three month high. That's a "risk-on" trade.

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Chart 3

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Chart 4

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Chart 5

RISING CANADIAN DOLLARS BOOSTS ISHARES ... Last Thursday's message showed a weak Canadian stock market underperforming the U.S. market by a wide margin this year. That negative divergence between the two North American giants is being relieved this week. Chart 6 shows the Canadian Dollar rising to a three-month high and trading well above its 200-day average. That's helping Canadian iShares (EWC) which are climbing above their 200-day line for the first time in three months (Chart 7). The EWC is rising faster than the Toronto Composite Index (not shown) which has yet to clear its 200-day line. [A rising currency will always cause its stock ETF to rise faster than its cash market. That's because foreign ETFs (like the EWC) are quoted in a weaker U.S. dollar]. A stronger Canadian Dollar also hints at an improving trend in commodity prices.

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Chart 6

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Chart 7

FOREIGN STOCK IMPROVEMENT... I've made the point in previous messages that foreign stock weakness has been weighing on U.S. stocks. Fortunately, that foreign weight is being lifted. Chart 8 shows the Vanguard All-World Ex-US iShares (VEU) trading at a three-month high and back above its 200-day average. Europe is a big part of that improvement. Chart 9 shows EMU Index iShares (EZU) breaking through its summer high to achieve an upside breakout. [Foreign stocks also do better when the U.S. dollar starts dropping and foreign currencies start rising].

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Chart 8

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Chart 9

SMALLER STOCKS START PLAYING CATCHUP ... One of problems facing the U.S. stock market has been the weaker performance in small and midsize stocks. That situation may also be improving. Chart 10 shows the S&P 500 Large Cap Index trading at a new three-month high and nearing a test of its spring highs. Its pattern of "higher highs and higher lows" that started in early June remains intact. Chart 11 shows the S&P 400 Mid Cap Index moving above two July peaks which is the first sign of improvement in that index. Chart 12 shows the S&P 600 Small Cap Index exceeding its late July peak. Both still need to clear their summer highs to confirm the uptrend in the large cap index. But they're finally starting to move in that direction.

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Chart 10

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Chart 11

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Chart 12

SEE YOU IN SEATTLE... I'm heading to Seattle to participate in ChartCon 2012 on Friday and Saturday which is the second annual event sponsored by Stockcharts. I had a great time at last year's event and expect to do the same this year. It's a rare opportunity to address attendees in person and to answer questions on the markets. The best part is the opportunity to meet and interact with so many of you over the two days. I'm looking forward to doing that again this week. See you in Seattle.