ECB COMMENTS GIVE BIG BOOST TO GLOBAL STOCKS -- -- EUROPEAN SHARES JUMP SHARPLY -- BOND AND DOLLAR WEAKEN -- PRECIOUS METALS CLEAR RESISTANCE BARRIERS -- REGIONAL BANK ETF NEARS NEW FOUR-YEAR HIGH -- THAT WOULD PUT THEM IN SYNC WITH RISING HOMEBUILDERS
EUROPEAN STOCKS SURGE ... The market's got what they wanted from the ECB president this morning. Mario Draghi announced an aggressive bond buying program that has given a huge boost to European stocks and other "risk on" assets. Chart 1 shows the Europe 350 iShars (IEV) surging to a new five-month high. Equally impressive are strong rallies in some of Europe's weakest markets. Charts 2 and 3 show Italy (EWI) and Spain iShares (EWP) climbing decisively above their 200-day averages with today's gains averaging 5%. That's giving a big boost to stocks in the U.S. Other asset classes are acting as expected. Europeans are buying Italian bonds and selling German bunds. They're buying the Euro and selling the U.S. dollar. They're also buying "risk on" currencies like the Australian and Canadian Dollars. The weaker dollar is giving a boost to commodities and precious metals in particular. Gold and silver are continuing their recent advance (as are stocks tied to them).
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Chart 1
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Chart 2
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Chart 3
GOLD AND SILVER ETFS BREAK TRENDLINE RESISTANCE... Last week's Tuesday message showed gold and silver ETFs testing major trendline resistance. Both have since broken out to the upside. Chart 4 shows the Gold SPDR (GLD) rising above a falling trendline drawn over its September/February highs. Chart 5 shows Silver iShares (SLV) breaking a resistance line extending back to last May. Money printing by central banks is bullish for precious metals. The same is true of mining stocks. Last week's message showed silver stocks leading the mining advance. Chart 6 shows the Global X Silver Miners ETF (SIL) having cleared its 200-day average. Gold miners are close behind. Chart 7 shows the Market Vectors Gold Miners ETF (GDX) on the verge of breaking through chart resistance at its June high and 200-day average.
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Chart 4
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Chart 5
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Chart 6
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Chart 7
REGIONAL BANKS ETF NEARS MAJOR UPSIDE BREAKOUT... Banks are one of the day's strongest groups -- and regional banks in particular. Chart 8 shows the KBW Regional Banking SPDR (KRE) surging more than 2% to a new five-month high and in position to challenge its spring high. That's a very important test. Chart 9 shows the KRE in the process of also testing its spring 2010 high. A decisive close above 29 would put the KRE at the highest level in four years and would complete a major basing pattern that began during 2009.
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Chart 8
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Chart 9
BANKS AND HOMEBUILDERS ARE LINKED... In a Market Message from last December (29th) I wrote a bullish article on banks and homebuilders. The main thesis was that banks and homebuilders are linked. Banks lend mortgages to people who want to buy homes. Both groups also started rallying together last October. Part of the December headline was "Regional Banks and Homebuilders May Provide 2012 Surprises to the Upside". So far, only half of the prediction has proven to be correct. Homebuilders have broken out to the upside and have been the year's strongest group. Regional banks may be about achieve their own bullish breakout. Chart 10 compares the iShares Dow Jones U.S. Home Construction iShares (brown line) to the Regional Bank SPDR (green line) over the last three years. Their positive correlation is clear. Both bottomed in the spring of 2009, peaked in the spring of 2010, the turned up together last October. The three-month Correlation Coefficient (below chart) shows a strong positive correlation between the two until the second quarter. That's when homebuilders broke out and regional banks didn't. Since then, the CC line has strengthened to .91. That greatly increases the odds that regional banks are about to join homebuilders in a new uptrend. If historical relationships remain intact, an upside breakout in banks would be a positive development for the rest of the market.
