GLOBAL STOCK RALLY IS STARTING TO BROADEN OUT -- GERMANY AND FRANCE LEAD EUROPE HIGHER -- GREEK STOCKS ARE BOUNCING FROM SUPPORT -- THE HEDJ IS THE BEST WAY TO HEDGE NEGATIVE IMPACT OF FALLING EURO -- SMALLER STOCKS LEAD S&P 500 HIGHER
DOW JONES GLOBAL INDEX HITS THREE-MONTH HIGH ... One of the major concerns in the new year has been fear that foreign markets would start to weigh on U.S. stocks. Although U.S. stocks have been the strongest in the world, they need some help from foreign markets. They're finally getting that. The daily bars in Chart 1 show the Dow Jones Global Index ($DJW) climbing today to the highest level in nearly three months, and rising above a falling resistance line drawn over its September/November highs. That suggests that the global rally in stocks is starting to broaden out. Today's ceasefire announcement in Ukraine is giving global stocks a boost. A more stable oil market is helping stabilize energy stocks and markets like Brazil and Russia; Australia and Canada are also firming up as commodity prices stabilize. [The dollar is also slipping]. A bounce in Greek stocks may be hinting at a compromise, which may be helping today's strong action in European stocks.
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Chart 1
FRANCE AND GERMANY LEAD EUROPE HIGHER... In case you haven't noticed, European stocks are doing very well. Chart 2 shows the two strongest stock markets belonging to Germany and France. Germany has hit a record high, while France is trading at the highest level in seven years. Chart 3 shows Italy and Spain stocks rallying as well. Both are still trading below 52-week highs, but their short-term trends have turned up. Greece has been a drag on Europe. The weekly bars in Chart 4, however, show the Dow Jones Greece Stock Index ($GRDOW) starting to bounce off potential chart support along its mid-2013 low. The weekly RSI and MACD lines are oversold and may be getting ready to turn positive. If they do, that would give Europe an added boost.
Chart 2
Chart 3
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Chart 4
HEDGED EURO FUND IS CLEAR LEADER ... Previous messages have expressed the need to hedge out the negative effect of a falling Euro on eurozone stocks. Those messages identified the WisdomTree Europe Hedged Equity Fund (HEDJ) as the best way to do that. Chart 5 shows why. The black line shows the HEDJ trading at a multi-year high after gaining nearly 16% over the last year. By contast, EMU iShares (EZU) have lost nearly -6%. Their divergent performance is due to the -17% loss in the Euro. When you buy a eurozone stock or ETF, you also buy the Euro. Money made on rising stocks is lost on the falling currency. That's why the HEDJ has become one of the most popular ETFs. According to Investor's Business Daily, assets in the HEDJ have doubled to $10 billion dollars over the last eight weeks. I hope some of the buyers are readers of these messages.
Chart 5
SMALLER STOCKS LEAD S&P 500 HIGHER... It's normally a good sign when smaller stocks are leading large stocks higher. That shows more optimism on the part of the investors, and willingness to assume more risk. That's why Chart 6 carries good news. It shows the S&P 600 Small Cap Index (blue line)nearing a test of its December high and leading the S&P 500 Large Cap Index (red line) higher. Since October, small caps have outpaced large caps by a 10% to 5% margin. The black line shows the S&P 400 MidCap Index already in record territory. The SPX itself is trading at a new 2015 high today. A test of its December high appears likely. It looks like stocks are making a strong bid to break free of their three-month trading range on the upside. [Another reason why investors may be favoring smaller stocks is because most of their business is domestic in nature, and is less effected by any headwinds from a strong dollar].
Chart 6
NASDAQ ALSO SHOWS LEADERSHIP... Upside leadership by the technology-dominated Nasdaq market is another positive market sign. Chart 7 shows the Nasdaq Composite Index breaking out to a new high in today's trading. Its relative strength line (top of chart) is doing the same. Apple's move to a record high is a big reason why tech stocks are doing so well. So is Cisco's 8% jump today. Chips stocks are also doing very well. All this is good for the rest of the market.
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Chart 7
HOMEBUILDERS RESUME UPTREND... My January 3 message expressed the view that the 18-year real estate cycle still had a long way to go on the upside. Shortly after that, homebuilders experienced a short-term pullback. It looks like they're resuming their uptrend. The weekly bars in Chart 8 show the Dow Jones Home Construction iShares (ITB) breaking out of a nearly two-year trading range on the upside. That puts the ITB at the highest level since 2007 when the housing market was in total collapse. The ITB/SPX ratio (top of chart) is also turning up after nearly two years of underperformance. The combination of lower mortgage rates, more discretionary spending from lower gasoline prices, and a better job market may be temping home buyers back into the market. And the spring buying season is just ahead.
