FOREIGN STOCKS LEAD U.S. MARKET HIGHER -- EMERGING MARKET ISHARES REACH THREE-MONTH HIGH -- STRONG UPTURN IN CHINESE STOCKS GIVES BOOST TO MATERIALS -- INDEX OF CYLICAL STOCKS HITS NEW RECORD -- END OF STOCK CORRECTION SIGNALLED BY 13-YEAR HIGH IN NASDAQ

FOREIGN STOCKS LEAD US HIGHER -- EEM BREAKOUT... In a role reversal from the first half of the year, foreign stocks are leading U.S. stocks higher. Chart 1 shows EAFE iShares (EFA) gapping to a new three-month high today and on the verge of the highest close in five years. The blue area (below the chart) shows the EFA/SPX ratio rising since July (when the Euro bottomed). A stronger Europe has been the main contributor to the rally in foreign developed markets. Emerging markets are turning in an impressive performance as well. Chart 2 shows Emerging Markets iShares (EEM) trading at a new three-month high after exceeding its summer highs. It's also on the verge of breaking through its 200-day line. The EEM/SPX ratio (below chart) has started rising as well. Good news out of China is the main catalyst in the EEM upturn.

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Chart 1

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Chart 2

BASIC MATERIALS FOLLOW CHINA STOCKS HIGHER ... Chart 3 shows the FTSE China iShares (FXI) breaking through its May peak to reach the highest level in more than six months (see circle). China is the biggest part of the emerging market universe and, at the moment, is the strongest market. That's a welcome change from the first half of the year. That also helps explain the recent strong action in basic material stocks tied to commodities. The line above Chart 3 shows the Materials SPDR (XLB) hitting a new record high. That has a lot to do with a stronger Chinese market. The solid area in Chart 3 plots an XLB/SPX relative strength ratio. Notice the close correlation between the ratio and Chinese stocks. Both fell together during the first half of the year, before turning up together since June. China is the world's biggest importer of commodities. A stronger Chinese market increases the demand for those commodities and common stocks tied to them. Stock groups leading the materials rally are in chemicals, paper, and steel. More on that later.

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Chart 3

CYCLICALS STOCK INDEX HITS NEW RECORD AND SHOWS LEADERSHIP ... Chart 4 shows the Morgan Stanley Cyclicals Index ($CYC) hitting a new record high today. [The CYC includes economically-sensitive stocks in metals, papers, machinery, chemicals, and transports]. By contrast, the solid gray line shows that the MS Consumer Index ($CMR) is lagging well below its old high. [The CMR includes stocks in more defensive categories like beverages, food, drugs, tobacco, and personal products]. Chart 5 is an updated version of a chart that I showed last Thursday. The solid black line is a relative strength ratio of the cyclicals divided by the consumer index, and shows the CYC/CMR ratio breaking out to the highest level since the first quarter of 2012 (see circle). The chart also shows that the rising stock ratio has coincided with a rising 10-Year T-Note yield since the spring. That would seem to suggest that rising bond yields are partially the result of more optimism on the part of investors. That's bad for bonds, but good for stocks.

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Chart 4

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Chart 5

NASDAQ HITS NEW HIGH WHILE S&P 500 EXCEEDS 50-DAY AVERAGE... The most convincing sign that the stock market's short-term correction has ended is the ability of Nasdaq Composite to reach the highest level in thirteen years (Chart 6). At the same time, Chart 7 shows the S&P 500 clearing its late August peak at 1669 and its 50-day moving average. That puts the SPX in position to retest its summer high. Chart 7 also shows the 14-day RSI line (top of chart) climbing above 50 which is a sign of strength. In addition, the daily MACD lines (bottom of Chart 7) have turned positive for the first time in a month.

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Chart 6

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Chart 7

DOW CHEMICAL AND INTERNATIONAL PAPER ARE MARKET LEADERS ... Chemicals and papers are two of the strongest categories in both the cyclical and material space. Dow Chemical is also one of the biggest stocks in both groups. The monthly bars in Chart 8 show Dow Chemical (DOW) on the verge of breaking through major overhead resistance around 39 (the peaks formed in 2007 and 2011). Its relative strength ratio (gray line) has just hit a new high for the year. A decisive close over 40 would represent a major bullish breakout for the big chemical leader. The monthly bars in Chart 9 show International Paper (IP) very close to closing above 50 for the first time in its history. The stock recently cleared its 1997 and 2000 highs near 45. Its relative strength ratio (gray line) has hit a yearly high. Steel stocks are also rallying. Chart 10 shows the Market Vectors Steel ETF (SLX) climbing to a new six-month high and clearing its 200-day line. The SLX/SPX ratio (gray area) has also been rising since July (when Chinese stocks bottomed). Leadership in both groups is a good sign for the economy and the stock market. Leadership in material stocks usually also bodes well for commodity markets which do better when Chinese stocks are rising. But not necessarily gold.

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Chart 8

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Chart 9

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Chart 10

GOLD SELLS OFF ON TECHNICALS AND HOPE OF SYRIA SOLUTION... I continue to believe that the major bull market in gold has ended, and that the current rebound is part of a larger downtrend. Part of that reasoning is based on the view that stocks have ended the "secular" bear of the last decade and have entered into a new secular bull market. Gold doesn't usually do well when stocks are strong. Gold also benefited form historically low interest rates over the last decade. It doesn't do as well in a climate of rising rates. Today's selloff in gold (and oil) is based largely on the view that the threat of military action in Syria has diminished. That also explains why global stocks are surging today. Chart 11 shows the Gold Trust (GLD) selling off from chart resistance drawn over its early June peak. In addition, its 14-day RSI line (above chart) has turned down from an overbought condition. Its daily MACD lines (below chart) have also turned down for the first time in two months. It's no coincidence that the daily MACD lines for gold are turning down just as the daily MACD lines for the S&P 500 (in Chart 7) are turning up.

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Chart 11

HOPE TO SEE YOU IN NEW YORK ... I'm very much looking forward to the SCU seminar in New York on the weekend of September 20 and 21st. It's one of the few opportunities I get to speak directly to and interact with a Stockcharts audience. The two days of instruction by Chip Anderson, Greg Schnell, and myself are designed to enhance your usage of the Stockcharts.com website and to improve your analytical skills. The venue in mid-Manhattan is ideally suited for this type of conference (with lots of parking nearby). I'll be taking the opportunity to update my views on intermarket analysis which is playing an increasingly important role in global market trends in bonds, stocks, commodities, and currencies. Hope to see you there.