FALLING DOLLAR AND RISING EURO SINCE SUMMER ARE CAUSING FOREIGN SHARES TO OUTPERFORM THE U.S. -- EAFE ISHARES ARE TESTING SPRING HIGH -- APPLE IS FAILING A TEST OF ITS 200-DAY AVERAGE -- THE NASDAQ IS IN DANGER OF FALLING BACK BELOW ITS 200-DAY LINE
FOREIGN STOCKS OUTPERFORM USA SINCE THE SUMMER... Chart 1 compares the S&P 500 to EAFE iShares (EFA) over the last two years. Although both lines have risen and fallen together (as they usually do), their rates of ascent have differed. Both bottomed during the fourth quarter of last year and rallied into the spring before selling off. After selling off together, both bottomed during July and have risen together since then. Notice, however, that EFA has lagged behind the S&P 500 since the spring. While the S&P hit a new yearly high, EFA is just now challenging its spring highs. In fact, the EFA is now rising faster than the S&P. The EFA/SPX relative strength ratio (below chart) bottomed at midyear and has been rising during the second half (see arrow). That means that foreign stocks have been rising faster than the U.S. I suggested in last Thursday's message that fears of a fiscal cliff might be driving some money out of the U.S. stock market and into foreign stocks. A weaker dollar might be another reason.
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Chart 1
FALLING DOLLAR AND RISING EURO HELP EAFE... One of the premises of global intermarket analysis is that the direction of the U.S. Dollar influences the performance of U.S. stocks relative to foreign shares. Chart 2 demonstrates that relationship by comparing the direction of the U.S. Dollar Index to a ratio of EAFE iShares divided by the S&P 500 (black line). The two lines trend in opposite directions. During the first half of this year, a rising dollar caused foreign shares to underperform the U.S. The vertical blue line, however, shows that a peak in the Dollar Index (down arrow) coincided with an upturn in the EAFE/SPX ratio during July. The falling dollar since then has contributed to stronger relative performance by foreign stocks (rising ratio). Most of the credit for that currency turn came from the Euro. The blue line along the bottom of the chart shows the Euro turning up during July at the exact point where the other two lines changed direction. Remember that the Euro accounts for 57% of the Dollar Index. European stocks also account for 57% of the EAFE. That suggests that European stocks have played a leading role in foreign stock outperformance. That relationship will probably continue until the dollar turns back up again, or the Euro weakens. Or, maybe until the fears of a fiscal cliff have passed.
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Chart 2
APPLE RALLY STALLS AT 200-DAY LINE... In my November 15 Market Message, I showed Apple heading down for a test of its spring low at 517, and suggested that test would likely have a bearing on the direction of the Nasdaq (since Apple is its biggest stock). Chart 3 shows that Apple (AAPL) scored an "upside reversal day" at that level in mid-November which launched a short-term rally attempt (see box). [An upside reversal day occurs when a stock opens sharply lower and closes higher in heavy trading, which was certainly the case with Apple]. Upside volume during the recent bounce, however, has been relatively light which isn't a good sign. Neither is the stock's inability to rise back above its 200-day moving average. That doesn't augur well for that stock or the Nasdaq market which is experiencing a similar test of its own.
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Chart 3
NASDAQ RALLY ALSO STALLS... Chart 4 shows the technology-dominated Nasdaq Composite Index in danger of slipping back below its 200-day average after failing a test of its 50-day line and resistance near 3025 (see line and arrow). That represented a 50% retracement of the recent decline which is where rallies often stall. The Nasdaq/SPX ratio (below chart) has been falling since September which reflects the weaker performance by the technology sector. That's not a good sign for the market which usually does better when large technology stocks are leading it higher.
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Chart 4
BOLLINGER BANDS OFFER SUPPORT AND RESISTANCE LEVELS... Bollinger bands are very useful for identifying potential support and resistance levels. Bollinger bands plot two outer bands two standard deviations above and below a 20-period moving average. Chart 5 shows what the 20-day bands look like. The Nasdaq is currently trading above its 20-day average (middle line) which means that its short-term trend is up. A drop below the middle line would turn its short-term trend back down again (possibly all the way to the lower band). 20 week bands offer a view of longer-range support and resistance levels. We can covert 20-week bands to a daily chart by changing the Bollinger daily band value from 20 to 100. Chart 6 shows that prices bounced off the lower 100-day band during November, but are meeting resistance at the 100-day moving average (red arrow). The Nasdaq needs to rise decisively above its 100-day average to turn its intermediate trend back up again.
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Chart 5
