FOREIGN MARKET WEAKNESS IS BEGINNING TO WEIGH ON OVERBOUGHT US STOCKS -- EMERGING MARKET ISHARES FALL TO LOWEST LEVEL IN FOUR MONTHS -- EUROPEAN ETF FALLS BELOW 50-DAY AVERAGE IN HEAVY TRADING -- RISING DOLLAR PUNISHES ENERGY STOCKS
EMERGING MARKET ISHARES CONTINUE TO DROP ... Last Thursday's message showed emerging markets rolling over to the downside, and warned that might be signalling a pullback in the U.S. That situation has grown worse since then. Chart 1 shows Emerging Markets iShares (EEM) falling to the lowest level since last November, and on rising volume. Some of the biggest losses are coming in the BRIC nations which are Brazil, Russia, India, and China. Given the high correlation among global stocks, it seems reasonable to assume that emerging market weakness is starting to spill over into developed markets. That's been especially true of European stocks this week.
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Chart 1
DROP IN EURO WEIGHS ON EUROPEAN STOCKS ... Thursday's message also showed EAFE iShares stalling at their 2012 peak and losing upside momentum. The blue bars in Chart 2 show the EAFE iShares (EFA) meeting some selling at their 2012 high. The green line shows the trend of the Euro over the last four years. You'll notice that the EAFE does better when the Euro is rising. That's been especially true since last July. Right now, the Euro is falling (green arrow). That's a bad sign for the EAFE which has a 57% weight in Europe. That's where the falling Euro is having the most negative effect. Chart 3 shows the Vanguard European VIPERS (VGK) having already formed a pattern of "lower highs" since the start of February which is a negative sign. The VGK is also falling below its 50-day average today in very heavy trading (red circle). The green line shows the Euro peaking at the start of February (with the VGK) and falling to the lowest level since last November. [The main catalyst for today's selling is confusion about the bank crisis in Cyprus]. The stronger U.S. dollar suggests that U.S. will continue to hold up better than foreign stocks. However, foreign weakness increases the odds for a pullback in an overbought U.S. stock market.
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Chart 2
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Chart 3
OIL SERVICE STOCKS LEAD MARKET LOWER ... The biggest casualty of a rising dollar is usually commodity prices and stocks tied to them. Not surprisingly, basic material and energy stocks are among today's biggest losers. [Gold and miners are experiencing a minor bounce on safe haven buying]. The hardest hit part of the energy patch is oil service. Chart 4 shows the Market Vectors Oil Services ETF (OIH) tumbling below its 50 day average today in heavy trading. Chart 5 shows Schlumberger (SLB) tumbling 3% in very heavy trading. Another sign that U.S. investors are turning defensive is that today's three strongest sectors are consumer staples, utilities, and healthcare.
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Chart 4
