STOCK INDEXES ENCOUNTER SELLING -- DOW TRANSPORTS HAVEN'T CONFIRMED INDUSTRIAL HIGH -- FALLING BONDS HAVE HURT UTILITIES -- STOCK/BOND RATIO, HOWEVER, LOOKS OVERBOUGHT -- FTSE WORLD INDEX BACKS OFF FROM RESISTANCE
TRANSPORTS HAVEN'T CONFIRMED DOW HIGH ... U.S. stocks are experiencing some selling today. A pullback from recent highs isn't too surprising considering the fact that some short-term negative divergences have surfaced. First with short-term momentum indicators. Chart 1 shows the Dow Industrials in the red today. Although the Dow recently rose above its December peak to a new record, short-term momentum indicators haven't. Note that the recent peak in the 14-day RSI (top of chart) fell short of its December peak. Daily MACD lines (below chart) have done the same. That has created short-term "negative divergences" which usually lead to a market pullback. Another negative divergence exists between the Dow Industrials and Transports. Chart 2 shows the recent bounce in the Dow Transports falling short of its fourth quarter high. One of the tenets of Dow Theory is that both averages need to hit new highs in order the confirm the market uptrend. Failure of either one to do so is a warning of a potential pullback. Chart 2 also shows the $TRAN in danger of falling below its (blue) 50-day average. Recent stability in the oil market has hurt the relative performance of airlines, rails, and truckers. No serious damage is being done to either chart. But the Dow Industrials may retest their 50-day line as well.
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Chart 1
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Chart 2
DOW UTILITIES TEST 200-DAY AVERAGE ... Chart 3 shows the Dow Utilities falling sharply during the month of February. That's been due primarily to the drop in bond prices over the last month and the jump in Treasury yields (top of chart). Utilities track bond prices very closely and underperform when bond prices drop and yields rise. [The same is true of dividend paying stocks in general like consumer staples and REITS which are underperforming]. Chart 3 also shows the $UTIL in the process of testing its (red) 200-day average. It will be interesting to see if selling in the industrials and transports lead to some short-term buying of utilities.
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Chart 3
STOCK/BOND RATIO MEETS RESISTANCE... The recent outperformance of stocks over bonds may have have run its course over the short run. The line in Chart 4 plots a "ratio" of the S&P 500 divided by the 20+Year Treasury Bond iShares (TLT). The stock/bond ratio jumped during February as stocks rose and bond prices fell. The stock/bond ratio is starting to stall near a resistance line drawn over its September/November highs. That suggests that short-term momentum may be shifting away from stocks and back to bonds. Chart 5 plots a ratio of the SPX divided by the 7-10 Treasury Bond iShares (IEF). Chart 5 shows the stock/bond ratio up against potential resistance along its September/December highs. That chart also suggests that the stock/bond ratio has risen too far too fast, and may be due for some correcting in the other direction. In other words, some profit-taking in stocks and nibbling in bonds. Those potential retracements, however, are unlikely to change any major trends currently in effect.
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Chart 4
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Chart 5
FTSE ALL WORLD INDEX STALLS AT 2014 HIGH... Chart 6 shows the FTSE All World Index ($FAW) backing off from previous peaks formed during July and September (at 286). Interestingly, it hit that exact number a week ago before backing off. That in itself isn't a sign of a major top. It does suggest, however, that global stocks (which include the U.S.) are in need of a breather. If a deeper correction does materialize, underlying support is likely near its December peak (278) which corresponds with its 200-day average. [The FAW includes 2900 stocks in 47 countries, which include developed and emerging markets].
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Chart 6
DOLLAR HITS NEW HIGH AS EURO TUMBLES... Last Thurday's message suggested that the U.S. Dollar Index was about to resume its uptrend, and the Euro its downtrend. Both of those currency trends have now resumed. Chart 7 shows the PowerShares U.S. Dollar Index (UUP) hitting a new multi-year high, while the Euro is falling to the lowest level in more than a decade (Chart 8). That may be in anticipation of the start of eurozone quantitative easing over the next week. QE is usually bullish for a region's stocks and bonds, but bad for its currency. All the more reason to hedge any stock purchases in the eurozone, and foreign stocks in general, against falling foreign currencies. The rising dollar is also keeping downward pressure on commodity markets. Weak commodity prices, in turn, are helping hold global bond yields down. While the dollar high may contribute to some buying of oversold Treasury bonds, fixed income money appears to be flowing into U.S. investment grade bonds which pay a higher yield than Treasuries.
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Chart 7
