BRIC ISHARES TEST OVERHEAD RESISTANCE AS CHINESE ISHARES RISE TO NEW 2014 HIGH -- CANADIAN STOCKS NEAR 2008 HIGH AND GET A BOOST FROM GOLD AND OIL -- UPSIDE BREAKOUT IN OIL HELPS ENERGY STOCKS BUT HURT AIRLINES
EMERGING MARKETS ISHARES ARE TESTING RESISTANCE... My May 28 message showed emerging market stocks moving up toward overhead resistance. That testing process continues. The weekly bars in Chart 1 show Emerging Markets iShares (EEM) ending the week above their October intra-day high (43.52), but still below their December 2012 intra-day peak at 44.35. With bond yields around the world dropping, and concerns that some developed stock markets (like the U.S.) may be overbought, global money continues to rotate into emerging markets. That earlier message focused on strong returns in South Korea and Taiwan. Today's message will focus on BRIC countries (Brazil, Russia, India, and China). The weekly bars in Chart 2 show MSCI BRIC iShares (BKF) in the process of challenging initial overhead resistance formed last October at 39.42. The BKF is also testing a trendline drawn over its 2012/2013 highs. Needless to say, a decisive close above those two lines would represent a bullish breakout in the four biggest emerging markets.
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Chart 1
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Chart 2
INDIA UPTREND LOOKS OVERBOUGHT... My May 18 message wrote about global funds starting to move into emerging market assets -- and India in particular. Optimism about the recent election win by the pro-business party pushed Indian shares sharply higher. Chart 3 shows the Wisdom Tree India Earnings Fund (EPI) rising to the highest level in three years. The Bombay Sensex Index hit a new record. India has been the strongest of the BRIC countries. The weekly RSI line on top of Chart 3, however, shows the EPI in an overbought condition which contributed to some profit-taking. The other three BRIC countries are continuing to gain ground.
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Chart 3
BRAZIL AND RUSSIA GAIN GROUND... Russia has the smallest weight in the BKF, but it can't be ignored. Tensions in the Crimea and Ukraine pushed Russian shares sharply lower during the first quarter. The weekly bars in Chart 4, however, show the Market Vectors Russia ETF (RSX) climbing to the highest level in five months. It still has a long ways to go to reach last October's high, but it is doing better. So is Brazil. Chart 5 shows Brazil iShares (EWZ) hitting a new 2014 high this week and nearing a test of last October's high. The EWZ has already risen above a falling trendline extending back to 2011 and appears to be bottoming. While Russia may be getting help from rising oil prices, Brazil may be getting help from stronger agricultural markets like coffee, sugar, and soybeans. Brazil has the second biggest weight in the BKF (26%). Second only to China.
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Chart 4
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Chart 5
CHINA ISHARES REACH 2014 HIGH... Chinese stocks carry the biggest weight in the BRIC ETF at 40% and, therefore, carry the most influence. And the trend there is also encouraging. The daily bars in Chart 6 show China iShares (FXI) climbing above the April peak at 37.40 this week and trading at the highest level in 2014. It's also trading well above its 200-day moving average. The FXI/EEM ratio (below chart) is starting to rise as well. That means that China is starting to lead emerging markets higher after lagging behind during most of the first half. The weekly bars in Chart 7 show the FXI moving up toward a resistance line drawn over its 2013 highs. That will be a very important test for it and emerging markets in general.
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Chart 6
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Chart 7
CANADIAN STOCKS GET BOOST FROM GOLD AND OIL... Among developed markets, one of the year's strongest performers is Canada which has gained gain 10% this year (more than twice as much as the S&P 500 gain of 4.75%). The monthly bars in Chart 8 show the TSX Composite Index having exceeded its 2011 peak and nearing a test of its 2008 high. A large part of the optimism in Canada is coming from rising commodity prices. Since Canada is a big producer of natural resources, its fortunes are closely tied to the direction of commodity markets. Stocks tied to basic materials and energy account for half of the TSX. This week's surge in gold and oil prices certainly helped. The two strongest Canadian stock groups this week were materials (8.2%) and energy (3.6%). Three of the top five material leaders were gold stocks. Over the the last month, the two strongest Canadian stock groups have been energy (8.4%) and basic materials (4.8%).
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Chart 8
OIL PRICES SURGE IN IRAQ CRISIS... The biggest market development this week was the surge in energy prices, owing to the crisis in Iraq. The weekly bars in Chart 9 show the Light Crude Oil Spot price breaking out out to the highest level in nine months. That will bear close watching because rising oil prices aren't good for most stocks, or the economy. It is good for energy stocks, however, which were the week's strongest sector. Not surprisingly, airlines were the weakest. Chart 10 shows Delta Air Lines (DAL) falling heavily on Wednesday and Thursday in very heavy trading (losing 7% for the week). Airlines are the most sensitive to rising oil because of their dependence on fuel. The stock bounced on Friday along with most other stocks (but on lighter volume). It remains to be seen if this week's selloff is the start of a correction in an overbought stock market. A lot may depend on what happens in Iraq and the price of oil. And the airlines.
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Chart 9
