RECORD HIGH BY SMALL CAP STOCKS IS A POSITIVE SIGN FOR THE MARKET -- SO IS THE UPSIDE BREAKOUT IN TRANSPORTATION STOCKS -- CHINESE ISHARES HIT 52-WEEK HIGH AND SHOW NEW GLOBAL LEADERSHIP -- THAT'S ALSO GOOD FOR COMMODITY MARKETS AND COPPER IN PARTICULAR
SMALL CAP INDEX HITS RECORD HIGH... One of the most impressive technical developments of Wednesday's stock surge was the ability of the Russell 2000 Small Cap Index (RUT) to reach a record high. [The S&P 500 Midcap Index did the same]. Chart 1 shows the RUT closing above previous highs reached during 2011 and 2012. Although not shown here, the RUT also cleared its 2007 peak. The blue line is a ratio of the RUT divided by the S&P 500. The ratio peaked in spring 2011 which began the correction/consolidation period that's existed since then. The ratio reached a new three-month high yesterday and broke its 18-month resistance line (blue circle). Given the tendency for small cap stocks to act as leaders for large caps on the upside, yesterday's bullish breakout is an encouraging sign for the rest of the market.
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Chart 1
TRANSPORTATION INDEX HITS 52-WEEK HIGH ... Another positive technical development was yesterday's upside breakout in transportation stocks. Chart 2 shows the Dow Jones Transportation Average ($TRAN) surging through its spring high to reach the highest level in 18 months. The gray line is a relative strength ratio of the Dow Transports divided by the Dow Industrials. The ratio peak in mid-2011. After bottoming during October, the ratio has now risen to the highest level in six months, and has broken its resistance line extending back to mid-2011. Leadership by transportation stocks is usually a good sign for the rest of the market. That's because transportation stocks (especially rails, truckers, and delivery) are cyclical stocks that are tied to the ups and downs of the economy. The weekly bars in Chart 3 show the transports rising above a "triangular" formation, and in position to challenge their 2011 and 2008 high.
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Chart 2
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Chart 3
CHINA RALLY IS GOOD ANOTHER SIGN OF GLOBAL STRENGTH ... Foreign stocks have been rallying faster than the U.S. over the past few months which is another tailwind for U.S. stocks. One of the most encouraging upturns is taking place in China. The weekly bars in Chart 4 show FTSE China iShares (FXI) breaking out to the highest level in more than a year (circle). Even more impressive is the fact that China is finally rising faster than stocks in the U.S. The red line is a relative strength ratio of the FXI divided by the S&P 500. The ratio has been falling since the end of 2010, which has acted as a drag on global stocks and commodities. The good news is that the FXI/SPX ratio turned up at mid-year and has broke its down trendline. Upside leadership by China is a good sign for other global stocks (including the U.S.) and for commodities.
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Chart 4
CHINESE UPTURN MAY BOOST COMMODITIES, ESPECIALLY COPPER... China is the world's biggest importer of commodities, and the trend of commodity markets is usually tied to China. That's especially true of economically-sensitive commodities like copper and oil. Chart 5 compares the trend of China iShares (FXI) to the First Trust Global Copper ETF (CU). The Copper ETF broke out yesterday to the highest level in ten months. It's no coincidence that new copper buying is occurring as Chinese stocks are also breaking out to the upside. The black line on top of Chart 5 shows crude oil starting to rise as well. That may carry good news for commodities as an asset class. Commodities underperformed stocks throughout 2012. That weakness coincided with weakness in China. New signs of strength in China may give a boost to commodities during 2013.
