OIL PLUNGES BELOW $60 ON FORECAST FOR LOWER DEMAND -- OIL EXPORTERS CONTINUE TO LEAD GLOBAL STOCK DECLINE -- RUSSIAN WEAKNESS HURTS EUROPE -- LATIN AMERICA LEADS EMERGING MARKETS ISHARES TO NEW LOWS
IEA CUTS OIL DEMAND FORECAST AGAIN... Crude oil can't catch a break. Plunging oil prices over the past few months have been attributed mainly to increasing supplies, largely resulting in the shale revolution in the U.S. This week, however, the International Energy Agency (IEA) cut its forecast for global oil demand for the fifth time in six months. It attributed that lack of demand to weakening global economic conditions. That caused the price of crude and brent oil to plunge to five year lows on Friday, hurting anything tied to oil production. That includes energy shares and stocks of countries that export energy. Big foreign losers continue to be Canada, Latin America, and Russia. Added to this week's list of big losers were Britain and Norway, and any number of oil-producing nations in the Mideast and Africa. The weekly bars in Chart 1 shows U.S. crude falling below $60 for the first time since 2009. Despite a very oversold reading on its 14-week RSI line (top of chart), there's no sign of bottom. Even though the U.S is relatively insulated from oil weakness, the concentration of selling in foreign markets and U.S. energy stocks has proven too much to withstand. As a result, U.S. stocks suffered their worst weekly percentage loss of the year.

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Chart 1
EAFE ISHARES FALL TO TWO-MONTH LOW... Foreign markets had an even worse week than in the U.S. The daily bars in Chart 2 show EAFE iShares (EFA) plunging on Friday to the lowest level in two months. Most of those losses came from Europe. Several countries in Central and Eastern Europe with economic ties to Russia (a huge energy exporter) are being hurt by weakness in that country. That's especially true of Russia's currency (the ruble) which has plunged 45% this year against the dollar. Ruble weakness has also weighed heavily on the Market Vectors Russian ETF (RSX) which has fallen to the lowest level since 2009 (top of Chart 2). [Foreign stock ETFs get hit with a double whammy when stocks and the local currency fall together].

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Chart 2
EMERGING MARKET ISHARES HIT NINE-MONTH LOW... My Wednesday message showed Emerging Market iShares (EEM) falling to a nine-month low. Chart 3 shows them ending the week even lower. Emerging markets are hit even harder by falling commodity prices. The dashed black line shows oil peaking at midyear and losing 45% of its value since the start of July. EEM iShares have lost -11% during that same time span. Its two biggest losers, however, have been oil producers Brazil and Russia whose stock ETFs have lost -25% and -40% respectively since July. They also happen to be among the largest countries in the EEM. The black line (below chart) shows Brazil iShares (EWZ) ending the week at a new five-year low. The EWZ is also being hurt by a -12% loss in its local currency. Mexico iShares (EWW) were shown on Wednesday falling to the lowest level in two years. Latin America has been one of the regions hardest hit by falling oil.

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Chart 3
GLOBAL DIVERGENCES GET EVEN WORSE... While the U.S. economy is in much stronger shape than foreign economies, it isn't immune from foreign weakness. That's especially true of foreign stock trends. Chart 4 shows a generally positive correlation between the S&P 500 (black bars) and the Vanguard FTSE All-World ex-USA ETF (VEU). [The VEU includes foreign developed markets (including Canada) and has a 25% weight in emerging markets]. Although the VEU has shown more volatility (deeper corrections) over the last two years, weakness abroad has generally produced weakness here (although not as much). What's especially striking at the moment is the huge negative divergence between the two lines. That's especially true as we near yearend. The VEU has lost -10% since midyear, versus a 2% gain in the SPX. Especially disturbing is the fact that the VEU peak at the end of November was well below its midyear peak, while the SPX hit a record high. The VEU is now bearing down on its October low and threatening to break that previous support level. That would put even more pressure on U.S. stocks which are starting to weaken.

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Chart 4
S&P 500 TURNS DOWN... U.S. stocks finally succumbed to global downside pressures resulting from the continuing collapse in the price of oil. Not surprisingly, U.S. stock selling was led by an -8% loss in energy shares and a -6% drop in material stocks. Industrial shares also lost -4%. The only sector to break even was utilities which benefited from a flight to safety into Treasury bonds. [The same is true of REITs]. Defensive consumer staples lost only -1.9%. Retail stocks (which benefit from falling gasoline) saw a small gain. The bottom line, however, is that S&P 500 weekly loss of -3.5% was the biggest of the year. And selling picked up as prices fell. The daily bars in Chart 5 show the S&P 500 falling back to its 50-day average, which is its first line of defense. With the price run up since mid-October being so steep, there aren't any obvious support points to look for. The two top Fibonacci retracement lines (38% and 50%) may provide support if the correction deepens. The 14-day RSI line (top of chart) fell below 50 and will most likely drop to oversold territory near 30. Daily MACD lines (below chart) have turned negative for the first time in two months. U.S. stocks should hold up much better than foreign shares. But they will probably remain under pressure until foreign stocks start to stabilize. And that may depend a lot on what the price of oil does from here.
