INTERMARKET TRENDS CONTINUE TO IMPROVE -- RISING BOND YIELD SUPPORTS STOCK RALLY -- SO DOES RISING EURO -- EUROPEAN STOCKS RALLY -- SO DOES CANADA WHICH IS BEING HELPED BY RISING COMMODITIES -- GOLD AND MINING SHARES MAY BE BOTTOMING
UPTURN IN BOND YIELD AND DOWNTURN IN BOND PRICE SHOW MORE OPTIMISM... This is the same headline that started my last Market Message two Tuesdays ago (August 7). It's even more true today than it was then. A couple of weeks back, the 10-Year T-Note Yield had just climbed above its 50 day moving average. Chart 1 shows it having since climbed all the way to its 200-day average. Over the past several years, rising bond yields have been associated with stock market strength, and that has been the case over the last month. That's because rising bond yields translate into falling bond prices. Chart 2 shows the Barclays 7--10 Year T-Bond iShares having falling well below their 50-day line during August. Money coming out of bonds usually finds its way into riskier assets like stocks and commodities. And that has been happening.
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Chart 1
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Chart 2
SO DOES A RISING EURO AND WEAKER DOLLAR... This headline is also taken from the August 7 message. At that time, I showed the Euro bouncing off support along its 2010 low at 121 and trying to clear its 50-day average. Today's action in Chart 3 shows it clearing that resistance line in more decisive fashion. The 14-day RSI line (top of chart) has climbed above the 50 line, and the daily MACD lines (below chart) are about to cross above their zero line. Those are signs of strength. A rising Euro usually results in a falling dollar. Chart 4 shows the PS Dollar Index Bullish Fund (UUP) falling to the lowest level in two months. That more positive combination is also good for global stocks. One region of the world that's looking a lot better as a result is Europe.
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Chart 3
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Chart 4
EUROPEAN STOCKS STRENGTHEN... Foreign stocks benefit from a falling dollar in two ways. For one thing, a falling dollar (which is viewed as a safe haven along with U.S. Treasuries) usually benefits "risk-on" assets like stocks. Secondly, foreign stocks benefit more than the U.S. when their currency is rising. Chart 5 shows Europe 350 iShares (IEV) having risen above their 200-day average (red line) and a resistance line drawn over their spring 2011/2012 highs. Its next important test will be its March 2012 high near 37. The IEV/SPX relative strength ratio (below chart) has also turned up during August. That's the result of a rising Euro (and falling dollar). That also means that European stocks are finally gaining some ground on the U.S. market. The same is true of Canada.
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Chart 5
RISING COMMODITIES BOOST CANADIAN SHARES... Three weeks ago (Thursday, August 2), I expressed concern about weakness in Canadian stocks and the big divergence between them and the U.S. market. That was because both North American markets usually have a close correlation. Fortunately, that divergence is being relieved by an upturn in Canadian shares (supported by a rising Canadian Dollar). Canadian markets are also being supported by rising commodity prices. Chart 6 shows the Toronto Composite Index ($TSX) rising above its 200-day average (red line) this week. It rose above its five month resistance line earlier in the month which signalled the end of that downtrend. The TSX now appears headed toward highs formed during the first half of 2012. The green area below the chart shows a rising Canadian Dollar which is also helping that country's stocks. So is rising commodities represented by the CRB Index (lower box). The CDW and the CRB are usually highly correlated. And both of them are highly correlated to Canadian stocks.
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Chart 6
GOLD TURNS UP ... Speaking of rising commodity prices, gold prices are finally making upside progress. Chart 7 shows that the Gold Trust SPDR (GLD) has been testing chart support formed at the end of 2012 near 150. Today's rally may put it at the highest level in nearly four months. The GLD still has a ways to go to break its yearlong resistance line. The same is true of gold shares. Chart 8 shows the Market Vectors Gold Miners ETF (GDX) climbing 2.5% today to reach a two month high. The GDX appears to have completed a successful test of its May bottom. It still needs a close above its June high (and 200-day line) to turn its trend higher. Its relative strength ratio below the chart, however, is already showing better performance by precious metal stocks.
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Chart 7
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Chart 8
NEW GOLD AND ROYAL GOLD ARE GROUP LEADERS... Two gold stocks have already turned up. Chart 9 shows New Gold (NGD) having already cleared a yearlong resistance line to turn its trend higher. It's also cleared its 200-day average. Its relative strength line (below chart) has been rising since May. Chart 10 shows another gold leader which is Royal Gold (RGLD). That gold leader is already challenging trading at new 2012 high. Its RS line is also rising.
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Chart 9
