S&P 500 CLOSES AT RECORD HIGH -- LAST WEEK'S LOW MARKS FIRST SUPPORT POINT -- POWERSHARES QQQ FINALLY SHOWS UPSIDE LEADERSHIP AND NEARS UPSIDE BREAKOUT -- EFA ISHARES REACH FIVE-YEAR HIGH -- JAPAN LEADS EAFE UPTURN -- EUROZONE BOUNCES OFF SUPPORT
S&P 500 REACHES NEW INTRA-DAY RECORD... Yesterday's S&P 500 close pushed it through its October 2007 intra-day high at 1576. That means we can finally say that the S&P 500 is breaking out of its 13-year trading range that started in 2000 (See Chart 1). This time last week I was worried about the possibility of a short- to intermediate-term pullback. The daily bars in Chart 2, however, show the SPX bouncing on Friday off its mid-March low at 1538 to contain the selloff (in the face of a very weak jobs report). Yesterday's new high resumed the uptrend. For traders with a short-term trading horizon, last week's intra-day low becomes an important support point. It means that traders can stay with the uptrend as long as that initial support level holds. The fact that the 50-day average is at the same level lends even more importance to last Friday's low. A number of other positive developments have taken place this week. One is a bullish breakout in an index of foreign shares. Another is yesterday's sharp upturn in technology shares.
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Chart 1
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Chart 2
NASDAQ 100 IS TESTING SEPTEMBER HIGH ... One of the unusual features of the stock market rally during 2013 has been leadership by defensive sectors like consumer staples, heathcare, and utilities. Another has been relatively weak performance by technology stocks. In a bull market, technology stocks usually show market leadership. That's why yesterday's strong rally in the PowerShares QQQ Trust (QQQ) was so encouraging. The QQQ represents the largest non-financial Nasdaq stocks, two thirds of which are in technology. The daily bars in Chart 3 show the QQQ surging 2% yesterday on strong volume. It outperformed the rest of the market by nearly a two-to-one ratio. [The QQQ bounced off its 50-day average last Friday before rallying]. That gave a needed boost to the QQQ/SPX ratio which has been falling all year (top of chart). The QQQ is now testing its September intra-day high near 70. A decisive close above that chart barrier would be a very positive development for it and the rest of the market. That would put the QQQ at the highest level in thirteen years. It would also provide investors with an opportunity to invest money in a lagging group that's just starting to play catch-up with more defensive shares. [A 5% drop in Microsoft today, together with a 2% drop in Intel, is weighing on the QQQ today].
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Chart 3
EAFE BREAKOUT... One of my recent concerns has been the lack of upside participation (confirmation) by foreign stocks. That has changed for the better over the last two days. Chart 4 shows EAFE iShares (EFA) exploding over the two days to the upside. It gets even better. The weekly bars in Chart 5 show the EFA also breaking though its spring 2011 high near 60. That puts the EFA at the highest level since 2008. In so doing, it puts the foreign benchmark of develop stock markets in sync with rising U.S. stocks. EAFE stands for Europe Australasia and the Far East. Although European stocks are rallying, most of the EFA leadership is coming from Australia and Japan. The Eurozone is lagging behind, but is also starting to bounce off chart support.
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Chart 4
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Chart 5
JAPAN LEADS EAFE RALLY -- EUROZONE LAGS... The biggest contributor to the EAFE breakout is Japan. One reason for that is that Japan has the biggest EAFE weighting (22%). A more important reason is that Japan iShares (EWJ) are breaking through their spring 2011 highs as shown in Chart 6. [The EWJ has taken longer than the Nikkei to break out because of the plunging yen. The EWJ is quoted in U.S. dollars]. Chart 7 shows Australia iShares (EWA) also trading over their 2011 highs. Two European leaders are Britain and Switzerland. Charts 8 and 9 show United Kingdom (EWU) and Switzerland (EWL) iShares trading above their 2011 highs. The laggards in Europe are continental shares tied to the Euro. Chart 10 shows EMU Index iShares (EZU) trading well below their 2011 highs. Having said that, it's encouraging to see them bouncing as well. The weekly bars in Chart 10 show the EZU bouncing off chart support at 32 (see arrow).
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Chart 6
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Chart 7
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Chart 8
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Chart 9
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Chart 10
JAPANESE YEN PLUNGE COINCIDES WITH GLOBAL STOCK RALLY... The huge monetary stimulus started by Japan may be boosting global stocks. For one thing, the plunge in the Japanese bond yield has forced money out of Japanese bonds into Japanese stocks. Some of that Japanese money may be finding its way into overseas markets as well in the search for higher yield. Japan has the world's lowest yield. Chart 11 compares the plunging yen to a rising Dow Jones World Stock Index (DJW) over the last two years. The inverse correlaton is striking. A drop in the yen during the first quarter of 2012 coincided with rising stock prices. The plunge in the yen since last October has also coincided with rising global stocks. The black line shows the DJW exceeding its 2011 high to reach the highest level in five years. Coincidentally, the yen has also fallen to the lowest level in five years. That got me wondering about the possible return of the so called "yen carry trade".
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Chart 11
RETURN OF YEN CARRY TRADE?... The so-called "yen carry trade" was a popular strategy which helped drive the last bull market in stocks. At the time, Japan had the world's lowest yields. As a result, global traders started to borrow yen at historically low rates (essentially shorting the yen) and investing that money in higher yielding global stocks. The falling yen helped fuel the global stock rally. Chart 12 shows the yen falling between 2005 and 2007 coinciding with rising global stock prices (see box). A sharp upturn in the yen during the second half of 2007 hurt stock values. Global traders were forced to unwind the carry trade which entailed buying their yen shorts and selling stocks. Fast forward to 2011 when a fourth quarter upturn in global stocks coincided with a peak in the yen. Is it just coincidendal that the falling yen since then has coincided with rising stock prices? Or that the 2013 yen plunge has pushed global stocks to the highest level since 2008. It may be just coincidence. But I can't help wonder if we're seeing a return of the "yen carry trade". Japanese bond yields are once again the cheapest in the world (thanks to aggressive bond buying by the BOJ). The yen is in a state of collapse. A lot of that Japanese bond money is moving into domestic and foreign stocks. I suspect, however, that global traders may also be returning to some version of the yen carry trade that helped fuel the last bull market in stocks. That would certainly explain the strong negative correlation between the falling yen and rising stock prices shown in the last two charts.
