EMERGING MARKET ISHARES TEST OVERHEAD RESISTANCE -- WHILE TAIWAN ISHARES REACH A NEW RECORD -- EAFE ISHARES NEAR TEST OF 2007 HIGHS -- WHILE GERMANY ISHARES HIT NEW RECORD -- JAPAN STOCKS CONSOLIDATE WITHIN UPTREND
EEM STILL TESTING TRENDLINE RESISTANCES... My May 18 message suggested that emerging markets might be approaching an important upside breakout. The weekly bars in Chart 1 show the Emerging Markets iShares (EEM) still testing the upper resistance line in three-year symmetrical triangle. A decisive close above that resistance line is needed to signal an important upside breakout in emerging market stocks. India was a main focus in that message because its stock market had surged to a record high on recent electoral results. I also showed strong chart patterns in South Korea and Taiwan. Although China is the biggest country in the EEM (17%), the second and third biggest country weightings are South Korea (15%) and Taiwan (12%). That gives them an important influence on the direction of the EEM. The monthly bars in Chart 2 show South Korea iShares (EWY) nearing a three-year high and testing a resistance line drawn along its 2007/2011 highs. Chart 3 shows Taiwan iShares (EWT) having already exceeded its 2011 and 2007 highs. Those two strong chart patterns seem to bode well for emerging markets in general.
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Chart 1
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Chart 2
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Chart 3
EAFE ISHARES NEAR TEST OF 2007 HIGH... The May 18th message also compared the relationship between the S&P 500 and foreign developed markets. Chart 4 shows the S&P 500 (upper chart) and EAFE iShares (EFA) moving in the same direction, but not at the same pace. Since the 2009 bottom, the S&P 500 (representing the U.S. market) has gained 160% versus an EAFE gain of 130%. While the S&P 500 cleared its 2007 peak last year, EAFE iShares have yet to do so. But they are nearing a test of that important overhead resistance barrier. That will be an important test for both. The 50-week Correlation Coefficient (below chart) shows a very strong correlation (.94) between the two markets. So what happens to the EAFE as it approaches the test of its 2007 high will have some influence on what happens in the U.S.
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Chart 4
EUROPEAN LEADERS ARE SWITZERLAND, BRITAIN, AND GERMANY... Most EAFE strength since 2009 has come from Europe. The three biggest gainers in Europe over those five years have been Switzerland (177%), Germany (166%), and Britain (151%). The Swiss stock market is already trading in record territory. Chart 5 shows United Kingdom iShares (EWU) trying to rise above their 2007 high. Chart 6 shows Germany iShares (EWG) having just done that. In my opinion, that makes Germany the most promising chart pattern in Europe at this point in time.
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Chart 5
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Chart 6
JAPAN CONSOLIDATING IN UPTREND... The Japanese market represents the world's third biggest economy (behind the U.S. and China). It's also the biggest country weighting in the EAFE iShares (19%). So its direction has a lot of influence on EAFE direction. Although Japan has been one of the world's worst performers over the last two decades, it was the world's strongest market during 2013. The weekly bars in Chart 7 plot the WisdomTree Japan Hedged Equity ETF (DXJ). [The DXJ hedges out the negative impact of a falling yen]. Japanese stocks started rising near the end of 2012, and surged throughout the first half 2013 (based on hopes that Abenomics would finally deal with Japan's deflation problem]. The solid line on top of Chart 7 shows the DXJ outperforming EAFE iShares during the first half of 2013. Since May 2013, the DXJ has been trending sideways in an apparent symmetrical triangle. It has also remained above support along its 2010 highs. Japan has been a drag on the EFA during that period. Needless to say, a resumption of Japan's uptrend would give a big boost to developed markets. The monthly bars in Chart 8 (plotted on a log scale) show the 2013 rally in the Nikkei Index stalling at a resistance line along its 1996, 2000, and 2007 highs. Add Japan to the list of foreign stocks that are testing major overhead resistance.
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Chart 7
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Chart 8
INTEL AND TAIWAN SEMICONDUCTOR LEAD ETF HIGHER... My weekend message showed the Technology SPDR (XLK) hitting a new recovery high. That upturn gained more strength from this week's upturn in semiconductors. Chart 9 shows the Market Vectors Semiconductor ETF (SMH) climbing to a two-month high this week. That's a good sign since the direction of semiconductors has a big influence on technology performance. The biggest holding in the SMH is Intel (18%) which jumped as well. The daily price bars on top of Chart 9 show Intel (INTC) testing resistance at 27. The monthly bars in Chart 10 show that Intel is also testing long-term resistance peaks formed during 2012, 2004, and 2002. A decisive close above those levels would be a major bullish breakout for the chip bellwether. The second biggest holding in the SMH is Taiwan Semiconductor (13%). The monthly bars in Chart 11 show TSM nearing a test of its 2000 peak. Its relative strength performance (above chart) is already at a new record. [TSM is the biggest holding in Taiwan iShares (21%), and is one of the reasons behind the record high in that ETF shown in Chart 3].
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Chart 9
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Chart 10
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Chart 11
IS CHINA SECRETLY BUYING US TREASURIES?... Treasury yields continue to drop. Chart 12 shows the 10-Year Treasury Note Yield (green bars) falling below its October low to reach the lowest level since last June. That seems surprising while stocks are rallying and the S&P 500 is at a record high. That has left most analysts (including myself) wondering why that's happening. An interesting article in the Financial Times this morning (by Michael MacKenzie) suggested that China may be behind the Treasury buying. [China is the biggest holder of U.S. debt]. The falling red line in Chart 12 is the Chinese yuan which has fallen sharply since January. It's generally believed that the Chinese central bank deliberately weakened the yuan by building up their reserves of U.S. dollars (buying dollars to weaken the yuan). According to the FT, some observers suspect that the Chinese are investing those dollars in Treasury bonds, but are doing so in Europe in order to disguise their purchases. Who knows? That makes as much sense as anything I've heard recently to explain the continuing drop in bond yields and continuing rally in Treasury bond prices.
