JAPAN ETF CLEARS 50-DAY AVERAGE -- SMALL CAPS LEAD U.S. MARKET HIGHER -- SO DO CONSUMER DISCRETIONARY AND FINANCIAL STOCKS -- WEAKER STOCK INDEXES ARE BOUNCING OFF 200-DAY LINES -- RECENT UPSIDE BREAKOUT IN VIX INDEX IS NOW IN DOUBT

JAPAN ETF RISES ABOVE 50-DAY AVERAGE... A falling yen is helping to lift Japanese stocks. Chart 1 shows the Japanese yen falling back below its 50-day average. A falling yen is bullish for Japanese stocks. Right on cue, Chart 2 shows the Wisdom Tree Japan Hedged Fund (DXJ) climbing above its 50-day average. [The DXJ hedges against the negative impact of a falling yen]. The upturn in Japan is coming just in time. The weekly bars in Chart 3 update a chart shown four weeks ago (June 4) which suggested major DXJ support near 42. That support level comes partially from the support line drawn over the early 2010 peak. [A previous resistance peak should become a new support level]. The shaded box also shows support resurfacing after retracing 50% of the past year's strong rally. The upturn in Japan may carry good news for other global stocks. Since all global stocks corrected downward over the last month, Japan's upturn may suggest that the selloff was overdone.

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Chart 1

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Chart 2

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Chart 3

SMALL CAPS LEAD S&P 500 HIGHER... It's normally a good sign for the market when small caps are leading it higher. And that's just what is happening right now. Chart 4 shows the S&P 600 Small Cap Index ($SML) trading well above its 50-day average and challenging a resistance line drawn over its May/June highs. Chart 5 shows the S&P 400 Mid Cap Index ($MID) testing both barriers. The S&P 500 Large Cap Index ($SPX) is the weakest of the three indexes. Chart 6, however, shows the SPX still trading below its red resistance line, but challenging its 50-day average. A decisive close above both lines is needed to signal an upturn in the benchmark index. [Note: Although this message was posted earlier this afternoon, the charts are updated to reflect today's closing prices].

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Chart 4

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Chart 5

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Chart 6

CYCLICALS AND FINANCIALS SHOW JULY LEADERSHIP ... Another positive sign comes from relative strength in consumer discretinary and financials over the last week. Charts 7 and 8 show the Consumer Discretionary (XLY) and Financials (XLF) SPDRs trading well above their 50-day lines. Their rising relative strength ratios (above charts) are also rising. Upside leadership by both economically-sensitive stock groups is a sign of imvestor optimism.

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Chart 7

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Chart 8

A LOT OF 200-DAY AVERAGES ARE BEING TESTED... Although the broad market has suffered only a modest downturn (less than 6%), a number of stock indexes and stock groups have dropped to their 200-day moving averages. Assuming their major uptrends are still intact, those indexes should find new support there. Otherwise, things will start to look a lot worse. Chart 9 shows the New York Composite Index ($NYA) bouncing off chart support along its April low and its 200-day average. Charts 10 through 13 show Materials, Energy, Technology, and Utilities SPDRS also bouncing off their 200-day lines. [Homebuilders, REITS, and telecom ETFs are doing the same]. The 200-day average is the line of demarcation between bull and bear markets. Assuming the market is in a downside correction, it seems logical to assume that those 200-day lines will hold.

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Chart 9

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Chart 10

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Chart 11

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Chart 12

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Chart 13

VIX PULLS BACK TO TEST SUPPORT... The recent upside breakout in the CBOE Volatility (VIX) Index was a negative sign for stocks. Chart 14, however, shows the VIX falling back below its breakout points at the February/April peaks, which calls into question the credibility of the breakout. Its recent pattern of "higher highs and higher lows", however, is still intact. A drop below its mid-June intra-day low at 15.36 would end that that rising pattern. That would be good for stocks.

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Chart 14

PERCENT NYSE STOCKS ABOVE MOVING AVERAGES IMPROVES... Chart 15 plots the Percent of NYSE stocks trading above their 50-day averages. The blue line recently plunged from overbought territory over 80% to oversold territory near 20%. And it is starting to improve. That's usually how stock corrections end. I'd like to see it climb above its mid-June peak at 55% to confirm that upturn. The red line in Chart 16 plots the Percent of NYSE stocks above their 200-day averages. The line fell to 53% during June before rebounding back over 60%. The red line remains above a rising trendine drawn under its 2012 lows. It would have to break that support line to signal a bigger stock market downturn. Right now, the major trend is still up.

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Chart 15

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Chart 16

HAPPY FOURTH OF JULY ... Trading will probably drop off over the rest of the week. Stocks close at 1:00 (NYT) tomorrow (Wednesday), and are closed for the the Fourth of July on Thursday. Friday should also see lighter volume. The summer seasonal pattern turns a bit more positive during July, which may give the market a boost next week. Have a happy and safe Fourth of July.