FOREIGN WEAKNESS FINALLY HITS U.S. STOCKS -- RISING VIX IS AT THREE-YEAR HIGH AND MAY HAVE FURTHER TO GO -- S&P 500 MAY RETEST ITS FEBRUARY LOW -- FOUR YEAR LOW IN BRENT CRUDE PULLS GERMAN BOND YIELD TO NEW RECORD LOW
FOREIGN WEAKNESS FINALLY HITS THE U.S.... It took awhile for it to happen, but tumbling foreign markets have finally pulled the U.S. market into a downside correction. The three lines in Chart 1 tell the story. The blue line shows EAFE iShares (EFA) peaking at the start of July and tumbling to the lowest level in more than a year. The EFA has already undercut its February low, and has lost -13% from since July. Most of that selling has come from Europe. The red line shows Emerging Markets iShares (EEM) peaking at the start of September and losing -11% since then. It too is leading the U.S. lower. The black line shows the S&P 500 tumbling more than 2% today to the lowest level in eight months. It has lost -9% and is very close to official correction territory at -10%. This is just another example of the basic intermarket principle that global markets are highly correlated. Anyone who believed that the U.S. market could "decouple" from falling foreign markets is learning the hard way that global markets don't decouple. Global correlations become even tighter on the downside when volatility spikes higher, which it has done with a vengeance.
Chart 1
VIX INDEX SURGES TO THREE-YEAR HIGH... The red line in Chart 2 shows the CBOE Volatility (VIX) Index surging to the highest level in three years. As explained in previous messages, a rising VIX is associated with a market downturn. Historically, major market bottoms have usually been associated with peaks in the VIX over 40. That was the case in 2010 and 2011. That suggests that the VIX has more room to rise before the current downturn runs its course. That also suggests that the U.S. stock market has further to fall.
(click to view a live version of this chart)
Chart 2
S&P 500 MAY TEST FEBRUARY LOW... The daily bars in Chart 3 show the S&P 500 having fallen below its August low and 200-day moving average. Today's low came close to testing April intra-day low at 1814. The 14-day RSI line (above chart) shows the SPX entering short-term oversold territory. The daily MACD lines (below chart), however, have fallen to the lowest level in more than a year. That suggests than the SPX is most likely headed for a test of its February intra-day low at 1737 (a drop of nearly 14%). The SPX made back more than half of its early losses this afternoon, which suggested some bottom-fishing late in the day. Any short-term bounce, however, is likely to run into heavier selling near its broken August low near 1900, and its 200-day average.
(click to view a live version of this chart)
Chart 3
FALLING OIL WORRIES GLOBAL MARKETS ... The plunge in the price of oil has really caught everyone's attention, and not in a good way. The black bars in Chart 4 show Brent Crude Oil falling to the lowest level in four years. [U.S. crude prices are at two-year lows]. Plunging oil, along with other commodities, is being viewed as signalling global weakness. It also raises fear of global deflation. That's especially true in Europe. The blue line in Chart 4 shows the German 10-Year Yield tumbling to a new historic low at .84%. Plunging foreign bond yields are pulling U.S. yields lower.
(click to view a live version of this chart)
Chart 4
TREASURY YIELDS TUMBLE... Continuing bad news from foreign markets had a dramatic effect on Treasury yields. The green line in Chart 5 shows the 10-year T-Note yield tumbling to the lowest level in more than year. The lower line shows the Five-year T-Note yield falling to the lowest level this year. A lot of that was due to strong buying of Treasuries in a huge flight to safety. Some members of the Fed are suggesting that weakness abroad may delay any potential rate increases here. Some are even talking about another round of QE. That's the first time I can recall Fed members talking about foreign influence on U.S. rate policy. And it's a sign that they're getting worried.
(click to view a live version of this chart)
Chart 5
SMALL CAPS REBOUND... The ability of market indexes to rally off their lows today suggests that today's earlier selling may have been overdone. [Treasury prices also ended well off their highs, which suggests short term exhaustion]. Hopes for a stock bounce were strengthened by an upturn in small caps. The daily bars in Chart 6 show Russell 2000 iShares (IWM) reversing higher this afternoon in heavy trading. Small caps have led the market lower. They may now be signalling that a short-term oversold condition could lead to a bounce. The IWM, however, will have to overcome a lot of overhead resistance along its May/August lows to signal any serious improvement.
