GLOBAL STOCKS SELL OFF IN RISING VOLUME -- A LOT OF MOVING AVERAGES HAVE BEEN BROKEN -- HIGH YIELD BOND ETF BREAKS 200-DAY LINE -- FOREIGN STOCKS FALL AS WELL -- A RISING DOLLAR IS HURTING EMERGING MARKET CURRENCIES AND STOCKS
NASDAQ AND S&P 500 BREAK 50-DAY LINES... Chart 1 shows the S&P 500 SPDRS closing below its 50-day line today in heavy trading. That's a negative combination. Chart 2 shows the Nasdaq Composite Index doing the same. Their daily MACD lines remain decidedly negative. The Nasdaq loss of -1.9% made it the day's weakest index. That's because the technology sector was the day's weakest sector with a loss of -2.19%. Chart 3 shows the Technology Sector SPDR (XLK) falling below its 50-day line. The biggest contributor to the tech selling came from Apple which fell -3.8% to end below its 50-day line as well. Apple is the Nasdaq's biggest stock.
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Chart 1
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Chart 2
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Chart 3
RUSSELL 2000 THREATENS TO BREAK AUGUST LOW... The Russell 2000 Small Cap Index fell -1.6% to close just above its early August intra-day low at 1107. A negative pattern of "lower highs" has already formed between July and early September (see falling red line). A close below 1107 would form an even more negative pattern of "lower lows". That would turn its trend lower and lead to an even more important test of its May low. A small cap breakdown would be bad for the rest of the market as well. The red circle shows the "death cross" referred to yesterday which occurs when the 50-day average closes below the 200-day. [The two EMA lines have not yet turned negative].
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Chart 4
HIGH YIELD BOND ETF BREAKS 200-DAY LINE... Most bond prices rose today in a normal flight to safety. But not high yield (junk) bonds. Chart 5 shows the iBoxx High Yield Corporate Bond iShares (HYG) falling to a two month low and ending below its 200-day average. That's the first time that's happened since June of 2013 during the so called "taper tantrum". The recent drop in prices comes after its August rally stopped below its June high, which set up a potential "double top" reversal pattern (see circles). Junk bonds are more closely correlated to stocks than bonds. That's why their recent weakness is another negative warning for the stock market.
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Chart 5
FOREIGN STOCKS ALSO FALL... Foreign look even worse. Chart 6 shows EAFE iShares (EFA) ending below its August low which puts it at the lowest level since April. It's also well below its 200-day average. Although European stocks lost -1.6%, Australia lost an even bigger -2.7%. Weakness in their respective currencies contributed to their bigger ETF losses. [EAFE stands for Europe Australasia and Far Eastern stocks]. Emerging markets fell as well. Chart 7 shows Emerging Markets iShares losing more than -2% to end at a four month low. The biggest ETF losers there were India (-3.1%), Brazil (-2.9%) and China (-2.1%). They're being hurt by a stronger dollar.
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Chart 6
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Chart 7
RISING DOLLAR HURTS EMERGING MARKETS ... The U.S. Dollar Index rose again today to the highest level in four years. A rising dollar pushes emerging currencies lower which can be bad for EM stocks and bonds. The green line in Chart 8 shows the Wisdom Tree Emerging Currency ETF (CEW) falling to the lowest level in six months. [The CEW includes 15 emerging currencies in Latin American, South Africa, Eastern Europe, and Asia]. And it falls when the dollar is rising. The problem is that emerging stocks are positively correlated with their currencies. That can be seen by comparing the CEW (green line) in Chart 8 with Emerging Markets iShares (red line). Both tumbled together between May and June 2013 (when U.S. bonds yields and the dollar rose), and bottomed together this February (while Treasury yields and the dollar weakened). The dollar upturn in July coincided with a peak in emerging market currencies. Falling emerging currencies are starting to hurt EM stocks which generally trend in the same direction. [Part of the reason is that several emerging markets are tied to falling commodity prices resulting from a stronger dollar]. Since global markets are positively correlated, downside corrections in foreign developed and emerging stocks increase the likelihood for a correction in the U.S. as well.
