EUROPEAN STOCKS LEAD GLOBAL RALLY ON ECB ACTION -- GERMANY AND FRANCE LEAD EUROPE RALLY -- BUT EURO FALLS TO ELEVEN-YEAR LOW -- WEAK OIL BOOSTS RETAILERS AND TRANSPORTS AS U.S. STOCKS RALLY -- S&P 500 CLEARS 50-DAY LINE -- VIX PLUNGES
ECB COMES THROUGH ... The ECB gave the world's financial markets what they wanted, and a little bit more. Mario Draghi expanded the ECB asset-buying program to include sovereign bonds to the tune of 60 billion euros per month at least until the end of September 2016. That comes to a total of 1.1 trillion euros ($1.3 trillion dollars). Most of the market reactions were reasonably predictable. The most obvious reaction was a 1.7% drop in the euro to the lowest level in more than a decade. That boosted the dollar to a new multi-year high. The monthly bars in Chart 1 paint a bearish picture for the common currency. That should keep a strong bid under the U.S. dollar which is negative for most commodity markets. [Gold is benefiting from lower global interest rates]. Global stocks rallied on the announcement, with the biggest gains coming from the eurozone.
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Chart 1
LARGE EUROPEAN LEADERS... Eurozone chart patterns are showing definite signs of improvement, especially the largest ones. Chart 2 shows the Dow Jones Germany Stock Index climbing 1.5% to a new 15-year high. Chart 3 shows the Dow Jones France Stock Index up 1.7% today and nearing a new seven-year high. Chart 4 shows the Dow Jones Italy Index climbing more than 2% to reach the highest level in more than three months. Other pockets of eurozone strength are seen in Belgium, Finland, Ireland, and the Netherlands. Even eurozone laggards -- Greece, Portugal and Spain -- are bouncing. But here's the caveat. Those strong eurozone chart patterns are quoted in euros. Most European stock ETFs (quoted in a stronger U.S. dollar) are showing much smaller gains on the day. To repeat what I wrote yesterday, anyone wishing to participate in stronger European stocks needs to hedge out the negative impact of a weak euro. [The Wisdom Tree Europe Hedged Equity Fund (HEDJ) is trading 2.0% higher at a new 52-week high]. Foreign stocks in Asia and the Americas are also benefiting from the ECB decision.
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Chart 2
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Chart 3
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Chart 4
S&P 500 RISES ABOVE 50-DAY LINE... U.S. stocks are bouncing as well. Chart 5 shows the S&P 500 climbing back over its 50-day average in afternoon trading (as did the Dow and the Nasdaq). It's being led higher by financials (banks), consumer discretionary stocks (mainly retailers) and transports (airlines and rails). The two latter groups are being supported by another drop in the price of crude oil. Midcaps are also doing better. Chart 6 shows the S&P 400 Mid Cap Index exceeding its 50-day line and reaching a new January high. Small caps are showing a larger percentage gain of 1.8%, and have been lagging behind. Chart 7, however, shows the S&P 600 Small Cap Index finding support at its 200-day average (red line) and also climbing above its 50-day line. It's a good sign for the market when all three indexes are rising together. [Note: This message was originally posted at 1:00 today, NYT and reflected the market's improved tone. I'm updating the charts and commentary at 3:00 pm simply to reflect this afternoon's stronger performance].
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Chart 5
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Chart 6
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Chart 7
VIX HITS NEW JANUARY LOW... Chart 8 shows the CBOE Volatility (VIX) Index dropping 14% in afternoon trading. More importantly, its January high fell short of its December peak (see falling trendline), which reflects a failed rally attempt. Today's drop also undercut its January low. That's a sign that short-term market sentiment is turning more positive. Thank you, Mr. Draghi.
