STOXX EUROPE 600 INDEX HITS RECORD HIGH -- SO DOES THE FTSE ALL WORLD INDEX -- THAT BODES WELL FOR GLOBAL STOCKS, INCLUDING THE U.S. -- SMALL CAP LEADERSHIP IS POSITIVE -- SO IS THE OEX BOUNCE OFF SUPPORT -- TRANSPORTS REGAIN 200-DAY AVERAGE
DJ STOXX EUROPE 600 AND FTSE ALL WORLD INDEX HIT RECORD HIGHS ... The major uptrend in foreign stocks took another big step to the upside this week. That was especially true in Europe and Asia. The monthly bars in Chart 1 show the Dow Jones STOXX Europe 600 Index ending the week above its 2007 and 2000 highs. Among individual markets, record highs were recorded in Germany and Britain. Chinese stocks in Hong Kong exploded to seven-year highs in an attempt to catch up to stocks traded in Shanghai. Japanese stocks ended at a new fifteen-year high. Those strong foreign gains were enough to push the FTSE All World Index (which includes the U.S.) to a new all-time high (Chart 2). Although most of those gains came in foreign markets, the bullish breakout in that global stock index bodes well for the U.S. as well. As I suggested in my Thursday message, the U.S. market (which hit a record high two years ago) had gotten too far ahead of the rest of the world. I believe that money flows out of the U.S. and into foreign markets during the first four months of 2015 was largely an attempt to close the gap between foreign and domestic shares. The fact that central banks in Europe and Asia have been lowering interest rates (while the U.S. is talking about a rate hike) also accounts for money flows into those markets. U.S. stocks have been trending sideways while foreign stocks have been rising. I believe it's just a matter of time before U.S. stocks rejoin the global uptrend.
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Chart 1
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Chart 2
SMALL CAPS LEAD, BUT LARGEST STOCKS BOUNCE AS WELL... Whenever we look at the U.S. stock market, we often focus on stronger groups like smaller stocks which usually lead in a rising market. Their relative strength is a positive sign for the U.S. market. It's also useful, however, to see how some of the weaker groups are doing. Their ability to stay above chart support is another positive sign. Chart 3 shows the S&P 600 Small Cap Index in a solid uptrend during 2015 and very close to a new high. Its 2015 gain of 4% is twice as big as the S&P 500 Large Cap Index which gained 2%. Small cap leadership is usually a good sign. Chart 4 shows the S&P 500 moving to the upper end of a "triangular" formation defined by converging trendlines. That's usually a bullish pattern. The SPX has also climbed back above its (blue) 50-day average. The most interesting pattern, however, may be Chart 5 which plots the S&P 100 Index (which includes the 100 largest stocks in the SPX). The OEX has been the weakest of the three indexes (up only 1% in 2015). That makes sense since the largest stocks have been the most negatively impacted by a rising dollar and have been market laggards. The good news is that the OEX also bounced impressively this week after finding support near its (red) 200-day moving average. A chain is only as strong as its weakest link.
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Chart 3
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Chart 4
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Chart 5
DOW TRANSPORTS RECLAIM 200-DAY LINE... Speaking of weak links, Chart 6 shows the Dow Jones Transportation Average climbing back above its 200-day average (red line) and its January lows. That also helped keep the Dow Jones Composite Average (DJA) in a sideways trading range (Chart 7). The DJA includes the 65 stocks in the Dow Industrials (30), Dow Transports (20), and Dow Utilities (15). Chart 7 shows the DJA bouncing this week off its January low and its 200-day average. [The Dow Utilities are also finding support at their 200-day line]. This week's bounce keeps the DJA in a sideways consolidation pattern within its major uptrend.
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Chart 6
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Chart 7
NYSE COMPOSITE INDEX NEARS HIGH... I also find the next chart both interesting and encouraging. It shows the NYSE Composite Index nearing a test of its highs that started forming last July. The shape of its pattern looks bullish, especially the "ascending triangle" formed since last December. [An ascending triangle has a rising lower line and a flat upper line, and is usually a bullish pattern]. The NYA includes all common stocks (in excess of 2000) that are traded on the NYSE. More than fifty of its largest stocks, however, are foreign companies which suggests that it's benefiting from recent strength in foreign markets. Even so, a new high there would be a positive sign for U.S. stocks.
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Chart 8
GENERAL ELECTRIC EXPLODES TO SEVEN-YEAR HIGH... The biggest stock story this week was General Electric (GE) which soared 10% on Friday on massive volume to a seven-year high. GE was the top percentage gainer in the Dow and the S&P 500. News that GE is selling its financial business to return to its more industrial roots, combined with a huge stock buyback plan, sent the stock soaring. The monthly bars in Chart 10 show GE breaking out of a yearlong holding pattern to reach the highest level since 2008 (see box). The stock has also broken a major resistance line extending back to 2000. The next potential upside target is its late 2007 peak near 32.
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Chart 9
