FOREIGN STOCKS LEAD US MARKET LOWER -- SHORT-TERM MARKET CHARTS SHOW DETERIORATION -- UKRAINE TENSIONS WEIGH ON GERMANY -- CHINA WEAKNESS AND RISING YEN WEIGH ON JAPAN -- FALLING BOND YIELDS ALSO HINT AT STOCK WEAKNESS
U.S. STOCKS HAVE A BAD WEEK ... My Wednesday message warned that the Dow Industrials could run into profit-taking near its January highs, and that weekly indicators for the S&P 500 were giving "negative divergences" which also warned of a market pullback. Combined with increased tensions in the Ukraine and concerns about problems in the Chinese economy, it was no surprise then to see the markets fall sharply later in the week. And some short-term technical damage was done. Chart 1 shows the Dow Industrials falling below its 50-day average (on rising volume). At the same time, the 14-day RSI line (above chart) slipped below 50. More importantly, daily MACD lines (below chart) turned negative for the first time since early January. I wouldn't be surprised to see the Dow retest its 200-day average and/or its February low. Chart 2 shows the S&P 500 falling back below its January high (also on higher volume) and threatening its 50-day line. Daily MACD lines turned down as well. [As shown on Wednesday, weekly S&P 500 MACD lines have been negative since January which makes this week's downturn potentially more serious].
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Chart 1
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Chart 2
EUROPE AND JAPAN FALL EVEN FURTHER ... While my recent commentary has focused on weakness in emerging markets, foreign "developed" stocks are also starting fall harder than the U.S. Chart 2 shows the S&P 500 (representing the U.S. market) losing only -.39% since the start of the year versus a -5.1% loss in the German DAX Index, and an even bigger -12% loss in Japan's Nikkei Index. Germany was hurt primarily by the situation in the Ukraine (as was the rest of Central and Eastern Europe which are highly dependent on energy exports from Russia). According to BARRON'S, a quarter of Russian exports go to Germany. Japan was hurt by a flight to safety into the Japanese yen and weakness in China, which is Japan's biggest trading partner.
Chart 3
GERMAN DAX FALLS TO 200-DAY LINE... The daily bars in Chart 3 show the German DAX Index rebounding on Friday after slipping below its early February low. It's also dangerously close to its 200-day moving average. Given the fact that Germany is the continent's biggest economy (and Russia's biggest trading partner), its direction is a bellwether for Europe. That's why it's important that the DAX stay above its red 200-day line. That's not the only support level to watch. The weekly bars in Chart 4 show the DAX also testing a rising support line extending back to spring 2012. While that test is going on, its 14-week RSI line (above chart) is testing its 50-line. Of more concern is the fact that its weekly MACD lines (below chart) have turned negative by the biggest margin in a year. Sunday's referendum in the Crimea (and its aftermath) could be a determining factor in whether or not German stocks are able to recover from this week's losses (and other global stocks as well).
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Chart 4
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Chart 5
RISING YEN HURTS JAPAN... Japanese stocks suffered one of the week's biggest losses of -6.2%. The orange bars in Chart 6 show the Tokyo Nikkei Average tumbling more than 3% on Friday to finish below its 200-day average (red circle). The Japanese yen is a safe haven currency which is bought when global stocks weaken -- as it did this week. That's especially bad for Japanese stocks which trend inversely to the yen (green line). That inverse correlation can be seen very clearly over the last year. Yen weakness from last August and October coincided with Nikkei rallies (see arrows). A yen bottom at the start of 2014 coincided with a Nikkei peak. This week's jump in the yen caused heavier selling in Japanese stocks. The reason why a rising yen is so bad for Japanese stocks is because so many of them are export oriented. A rising yen makes their exports more expensive to foreign buyers. To make matters worse, Japan's biggest trading partner is China which is having economic problems of its own. The recent plunge in the Chinese yuan could cause even more problems for Japanese exporters (see Chart 7). Yuan weakness makes it more expensive for the Chinese to import foreign goods. Especially from an exporter with a rising currency -- like Japan.
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Chart 6
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Chart 7
FALLING BOND YIELD ALSO THREATENS STOCK RALLY ... Another potential threat to U.S. stocks is falling bond yields. Chart 8 shows the 10-Year Treasury Note Yield ($TNX) falling below its 200-day average this week. That drop was caused by global inflows into U.S. Treasury bonds which had a strong week. [Bond prices and yields trend in opposite directions]. Investors buy U.S. bonds when they're nervous about a stock market correction, which pushes yields lower. That makes bond yields an important indicator for stock market direction. The last peak in the TNX took place in early January which warned of stock correction later that month (see arrows). This month's downturn may be hinting at another one. Chart 8 shows the TNX moving close to the lower end of a six-month trading range. It's important that it stay above its October low. Any break of that important support level would signal a deeper stock correction. The drop in bond yields also contributed to the buying of dividend-paying consumer staples and utilities which were the week's strongest sectors. Both are also defensive in nature. Safe haven money also continues to flow into gold. My Wednesday message suggested that also hints at a stock market correction.
