U.S. STOCKS ARE THE STRONGEST IN THE WORLD -- EMERGING MARKETS ARE WORLD'S WEAKEST -- % OF NYSE ABOVE 50- AND 200-DAY AVERAGES IS DROPPING -- TODAY'S SHARP REBOUND IN FOREIGN CURRENCIES STEADIES FOREIGN MARKETS -- S&P 500 BOUNCES OFF 50-DAY MOVING AVERAGE
U.S. STOCKS ARE THE STRONGEST IN THE WORLD... U.S. stocks remain the strongest in the world. The two charts below use relative strength analysis to demonstrate that. Chart 1 plots a relative strength ratio of the S&P 500 divided by EAFE iShares (EFA) over the last three years. [The EAFE measures foreign developed markets in Europe, Australasia, and the Far Eest]. The ratio has been rising during that period of time. During those three years, the S&P 500 rose 50% versus a 35% EAFE gain. The S&P 500 did even better than emerging markets which gained only 14% during the same time span. Chart 2 shows a ratio of the S&P 500 divided by Emerging Market iShares (EEM) at the highest level in three years. During 2013, the S&P has risen more than three times faster than EAFE (13% versus 4%) and five times faster than EEM (which fell -8%).
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Chart 1
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Chart 2
FOREIGN STOCKS WEAKEN ... Although the U.S. market is expected to hold up better than foreign stocks, it isn't immune from the downward pull of foreign selling. Chart 3, for example, shows EAFE iShares (EFA) falling below its 50-day moving average to the lowest level since April. [Although Japanese stocks are the biggest losers, Australian, British, and Swiss stocks have entered downside corrections]. The biggest concern is in emerging markets. Chart 4 shows Emerging Market iShares (EEM) falling below its April low. The EEM has also broken its 200-day moving average. [My message from last Saturday suggested that expectations for Fed "QE tapering" have weakened the appeal of emerging market currencies, bonds, and stocks]. Some of the biggest EEM losers are Brazil, China, and Russia which are tied to the lower trend of commodity prices. Today's upturn in both foreign stock ETFs took some sting out of this week's losses, and helped the EEM regain its April low. Today's upturn in foreign stock ETFs may be due to a plunge in the dollar, and a rebound in foreign currencies (more on that shortly).
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Chart 3
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Chart 4
TOO MANY NYSE STOCKS ARE FALLING BELOW AVERAGES ... The blue line in Chart 5 plots the % of NYSE stocks trading over their 50-day averages. Two things are of concern. The first is that the May peak in the index fell short of its January peak, thereby creating a "negative divergence' between it and the rising S&P 500 (see falling trendline). The second concern is that the index has fallen back to its April low near 40%. A drop below 40% is usually a warning of more serious market pullback. The longer-range trend is also weakening. The red line in Chart 6 plots the % of NYSE stocks trading above their 200-day average. After forming a "lower high" during May, that index has since fallen below its April see (see red circle). That also suggests some deterioration going on beneath the surface in the U.S. stock market.
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Chart 5
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Chart 6
S&P 500 BOUNCES OFF ITS 50-DAY AVERAGE... The S&P 500 has already suffered the biggest percentage decline since it bottomed last November. So far, however, no serious chart damage has been done. Chart 7 shows the SPX rebounding this afternoon off of its 50-day moving average, and a support line drawn under its November, December, April lows. An afternoon rebound in foreign stock ETFs may have contributed to the late rebound in U.S. stocks. That foreign stock rebound may be due to today's sharp upturn in foreign currency markets versus the U.S. dollar.
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Chart 7
DOLLAR PLUNGE BOOSTS EURO AND YEN... The ECB left rates unchanged today and suggested that any further easing moves would be put on hold. That contributed to heavy selling of the U.S. Dollar versus the Euro and yen. Chart 8 shows the US Dollar Bullish ETF (UUP) tumbling today in heavy trading. Chart 9 shows the Euro moving above its May high. Chart 10 shows the yen also rallying versus the dollar. Most other foreign currencies jumped against the greenback, including a basket of emerging market currencies. That helped foreign stock ETFs (including emerging markets) rebound from earlier losses.
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Chart 8
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Chart 9
