DOW JOINS S&P 500 IN RECORD HIGH -- NASDAQ NEARS TEST OF ITS 2000 HIGH -- GERMAN DAX HITS NEW RECORD -- BRITAIN MAY BE NEXT -- JAPAN REACHES 15-YEAR HIGH -- DOLLAR INDEX TESTS 20-YEAR RESISTANCE LINE -- EAFE ISHARES BREAK OUT TO UPSIDE ON GOOD VOLUME
DOW JOINS REST OF THE MARKET IN NEW HIGHS. ... The chart picture for U.S. and global stocks brightened even further on Friday. [News that eurozone finance ministers offered Greece a four-month extension of its bailout package gave a late boost to global stocks]. All major U.S. stock hit new highs. The last to do so was the Dow. That's not usual, since the blue chip average usually lags behind in a market rally. Chart 1 shows the Dow Industrials closing at a record high on Friday. That puts it in sync with the rest of the market. Chart 2 shows the S&P 500 reversing higher on Friday to solidify its recent record high. [Trading volume picked up on Friday]. The most impressive gain came from the Nasdaq which was the week's strongest index. That can be seen by the rising Nasdaq/SPX ratio on top of Chart 3. That's also normal in a rising market. Chart 3 also shows the Nasdaq Composite ending the week at 4955. That puts the Nasdaq at the highest level in fifteen years, and within striking distance of its spring 2000 high.
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Chart 1
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Chart 2
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Chart 3
NASDAQ NEARS TEST OF 2000 HIGH... The monthly bars in Chart 4 shows the Nasdaq Composite ending the week just 177 points (3.5%) from its March 2000 intra-day high at 5132. [It's only 93 points (1.9%) from its 2000 closing high at 5048]. There's little doubt that it will reach that major milestone in short order. The question is what will happen when it gets there. It's not unusual for a major index to encounter some profit-taking when it reaches a major previous peak. But I doubt it will mark a major top. Although it's currently the only U.S. stock index that hasn't hit a record, that doesn't mean that it hasn't done as well as the others. It's actually done much better. It just had more ground to make up. The Nasdaq lost nearly -80% between 2000 and late 2002, while the S&P 500 and Dow lost -40% and -20% respectively. Since the 2002 bottom, the Nasdaq has gained 320% versus an S&P 500 gain of 160% (the Dow rose 140%). Since the spring 2009 bottom, the Nasdaq gained 260% which outpaced an S&P gain of 187% (and the Dow's 156%). That stronger Nasdaq performance can be seen by the rising Nasdaq/SPX ratio (gray area) since the 2002 and 2009 bottoms. The fact that the technology-dominated Nasdaq is leading the market higher argues for continuation of the secular bull market. So does stronger action in foreign markets.
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Chart 4
FOREIGN STOCK INDEXES ... Stock indexes in Europe and Japan are achieving impressive upside breakouts of their own. The monthly bars in Chart 5 show the German DAX Index closing at a record high. Chart 6 shows the London FTSE Index very close to doing the same. The FTSE closed the week at 6915 which puts it just shy of its late 1999 high at 6950. Upside breakouts by the two largest markets in Europe certainly bode well for that region. Asia is perking up as well. The monthly bars in Chart 6 show the Tokyo Nikkei Average ending the week at 18332 which puts it at the highest level since 2000 as well. [Chinese stocks were closed for the lunar new year. Hong Kong will reopen on Monday, and Shanghai on Wednesday]. Keep in mind, however, that those foreign stock gains are quoted in local currencies. The gains are much smaller when translated into U.S. dollars. Since last October's bottom, the DAX has gained 16% in local terms. In dollar terms, however, the gain has been much smaller 6%. The FTSE gained 4% over the same span in terms of the weaker pound, but lost -4% when quoted in U.S. dollars. The Nikkei rose 13% over the last four months in yen terms. It gained a smaller 3% in terms of the dollar. Which is why I've been writing about the need to hedge against the negative effects of weaker foreign currencies and a strong dollar.
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Chart 5
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Chart 6
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Chart 7
DOLLAR TESTS LONG-TERM RESISTANCE LINE... I'm a long-term bull on the U.S. dollar. That's partially for technical reasons, and partly due to the fact that we're the strongest economy in the world with the highest interest rates (which are likely to move higher). Over the last year, the U.S. Dollar Index has risen to the highest level in more than a decade (see Chart 8). The 14-month RSI line (below chart) shows the USD in an overbought condition (over 70). That may explain its recent sideways consolidation against the Euro and Yen. At the same time, there's an important test going on. The monthly bars in Chart 8 show the U.S. Dollar Index now challenging a 20-year resistance line going back to 1985. Needless to say, that's an important test. A decisive close above that resistance line is needed to signal that the 20-year downtrend in the dollar is over, which would call for much higher prices. I suspect that will happen sooner or later. Which is why I'm reluctant to bet against the dollar when investing in foreign markets.
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Chart 8
FOREIGN ETFS BREAK OUT... Thursday's message showed EAFE iShares (EFA) trying to break out to the upside. [EAFE includes stocks in Europe Australasia and the Far East]. Chart 9 shows the EFA doing so on Friday in decisive volume. Late news of the Greek bailout extension probably explains the buying in foreign ETFs (especially Europe). [Foreign cash markets were already closed]. The chart shows EFA closing at the highest level in five months (on rising volume). It has also cleared its fourth quarter high as well as its 200-day average (red line). Since the start of the year, EAFE has outperformed the S&P 500 by a 7% to 2.5% margin. What's especially impressive is that the EAFE (which is quoted in dollars) is rising with little help from foreign currencies.
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Chart 9
VANGUARD TOTAL WORLD ETF HITS NEW HIGH... Chart 10 shows the Vanguard Total World Stock ETF (VT) hitting a new 52-week high on Friday. As the name implies, the VT includes the U.S. in its global stock holdings. In fact, the U.S. is its biggest weighting (52%). Foreign developed markets account for 39%, with a 9% weight in emerging markets. This fund offers American investors a simple way to hold a balanced combination of U.S. and foreign stocks. In addition, it offers a more diversified exposure to currency trends. The 52% U.S. portion is a vote for a stronger dollar. The 48% foreign holdings are a bet on foreign currencies. That sounds like a pretty good currency hedge. The rising relative strength line (top of chart) has been rising since the start of the year. That's the same rising pattern we're seeing in all portfolios that include foreign stocks. If you're thinking about diversifying into foreign markets (which seems like a good idea), this fund is a good place to start.
