NASDAQ AND SMALL CAPS LEAD MARKET HIGHER FOR A CHANGE -- CONSUMER DISCRETIONARY AND FINANCIALS STOCKS ALSO SHOW NEW LEADERSHIP -- EURO REBOUNDS AFTER ECB EASING -- BUT EUROZONE STOCKS AND BONDS RALLY - EUROZONE STOCKS MAY START TO OUTPACE THE U.S.
NASDAQ AND RUSSELL 2000 CHARTS TURN POSITIVE... This week's strong chart action in the Nasdaq market and small caps has lent more support to large cap stock indexes that have been setting new record highs. Chart 1 shows Powershares QQQ Trust breaking out to a new recovery high this week. Its relative strength ratio (above chart) has also been rising. Relative weakness in the Nasdaq between February and April had been one of the drags on the rest of the market. The same is true of small caps. Chart 2 shows Russell 2000 iShares (IWM) climbing to a two-month high and ending well above its 50-day moving average. Small caps actually did better than large caps during the week. That's reflected in its relative strength ratio (top of Chart 2) which bounced this week. The RUT/SPX ratio has been stabilizing over the last month after falling sharply from March to May.
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Chart 1
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Chart 2
FINANCIALS AND CYCLICALS IMPROVE AS WELL ... Sector rotations have also turned more positive. Six of the nine sector SPDRs hit new highs this week. Chart 3 shows the Financials Select SPDR (XLF) breaking through its March high. Its relative strength ratio (top of chart) has also started to rise. Financials had been one of the market's weaker sectors since March. It was one of the strongest this week and was led higher higher by insurance and bank stocks. That's a good sign for the market. Although they didn't hit new highs, cyclical stocks also had a good week. Chart 4 shows the Consumer Discretionary SPDR (XLY) climbing to a three-month high. Its relative strength ratio (top of chart) has also started climbing for the first time in three months. That shows more optimism on the economy. The XLY was led higher by autos and homebuilders. The two other sector SPDRS that didn't hit new highs were healthcare and utilities which are more defensive in nature.
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Chart 3
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Chart 4
EURO HOLDS 200-DAY LINE AFTER ECB EASING... Dramatic steps by the ECB on Thursday to ward off deflation and help boost eurozone economies had a positive effect on that region's bonds and stocks (more on that shortly). Chart 5, however, shows that the Euro dropped initially on the ECB announcement before reversing higher. That late recovery kept the Euro at its 200-day moving average. A weaker Euro is one of the goals of the ECB. One likely reason for the Euro turnaround is that the drop in the Euro over the last month had already discounted this week's announcement. The other may be the presence of chart support along its early February low. The Euro bounce hurt the dollar. Chart 6 shows Powershares Dollar Index ETF (UUP) backing off from its 200-day moving average. The Euro rebound was the main reason why. Although currency moves were somewhat confusing, strong action in Euro bonds and stocks wasn't.
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Chart 5
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Chart 6
EUROZONE STOCKS HAVE STRONG WEEK... Eurozone stocks reacted very positively to the ECB decision to lower short-term rates and offering funds to banks to lend to smaller Euro companies (with the promise of more steps to come). Chart 7 shows EMU Index iShares (EZU) surging to a new high late in the week. Eurozone stocks did even better than the U.S. For the week, the EZU gained 1.8% versus a 1.3% gain for the S&P 500. [The EZU includes stocks in eurozone countries with the biggest holdings in France, Germany, Spain, the Netherlands, and Italy]. The ECB president hinted that some form of quantitative easing might be in the works (while the Fed is ending its QE bond buying program later this year]. That combination would seem to favor eurozone stocks over the U.S. Chart 8 shows EMU iShares reaching the highest level in six years this week. The red line plots a ratio of the EZU divided by the S&P 500. The falling ratio shows Europe underperforming the U.S. since 2009. The EZU/SPX ratio has risen since 2012, however, and appears to be bottoming. It has already broken a downtrend line extending back to 2009. An upside breakout by the ratio (which seems likely) would suggest that eurozone stocks are starting to do better than those in the U.S. [The biggest euro gains came in peripheral countries like Greece (6.6%), Italy (3%), and Spain (2.4%). Their bond markets were also especially strong. The reasoning there is that some money flowed into bonds in those smaller countries in the search for higher yield].
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Chart 7
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Chart 8
STOCK/BOND RATIOS STILL FAVOR STOCKS... Last Saturday's message showed a ratio of the S&P 500 divided by the 30-Year Treasury Bond price having broken a downtrend line extending back to 2000, which signaled a major shift in favor of stocks. It mentioned that the stock/bond ratio had been consolidating during the first half of 2014 within a major uptrend. Chart 9 shows that S&P 500/ 30-Year T-bond ratio starting to break out of a triangular formation that's been in effect since January. That means that the asset allocation pendulum is swinging back to stocks. Chart 10 shows an even stronger pattern in the ratio of the S&P 500 divided by the 10-Year Treasury Note price ($UST). The S&P 500/T-Note ratio is now trading at the highest level in 14 years. The reason the stock/note ratio in Chart 10 is stronger than the stock/bond ratio in Chart 9 is that the 30-Year T-Bond had a stronger first half than the 10-Year T-Note (6.4% versus 2.1%). As a result, stocks did better relative to the shorter (and weaker) maturity.
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Chart 9
